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Daily Commentary 14/11/14

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The Big Picture
Oil prices plunge A fairly quiet day in the financial markets but a huge day for oil. With little news to move the market, ten-year US yields were down 3 bps, stocks closed virtually unchanged for the third day in a row, and the dollar was generally higher.

The biggest action was in the oil market, where prices plunged further. Iraq and Kurdistan reached a deal on oil exports that could add as much as 400k b/d to oil supply next year. Iran’s negotiations with the US over the former’s nuclear projects continue, holding open the possibility that Iranian supplies will be available to the West if an agreement is reached. Meanwhile, OPEC is resisting calls to cut production at its Nov. 27th meeting and instead is cutting export prices to the US, where there is already a glut of oil, in an apparent effort to force high-cost US shale producers out of the market. The decline in oil prices is likely to have a beneficial effect on global economies: Wal-Mart Stores, for example, announced a rise in same-store sales in Q3 for the first time seven quarters, with declining gasoline prices cited as one of the causes. On the other hand, lower oil prices are causing a headache for central banks as inflation falls around the world. Poland’s CPI was -0.6% yoy in October, the lowest since 1982, while the Bank of Italy warned that a prolonged period of price stagnation would damage its hopes of lowering its huge public debt, now the second highest in Europe after Greece at 132% of GDP.

The collapse of oil prices is bad news for the commodity producing countries and indeed CAD was the second-worst performing G10 currency after GBP, which is still suffering the after-effects of Wednesday’s inflation report. Energy exports, largely to the US, account for 24% of Canada’s total exports and so US energy prices are crucial for Canada’s terms of trade. On the other hand, NOK was stable vs USD yesterday. Over the last 10 years, the currency pairs most sensitive to oil prices have been USD/NOK, USD/CAD, AUD/USD, AUDJPY and USD/BRL. Looking at a shorter time frame (the last two years), USDRUB tops the list and USDMXN is fairly high in the list as well.

The US Job Opening and Labor Turnover Survey (JOLTS) report showed job openings down more than expected in September at 4.735mn, off from 4.835mn in August. However, the market’s focus here is on the “quit rate,” that is, the rate at which US workers quit their jobs. This is a great indication of confidence in the job market, because in today’s world, few people are going to quit their jobs unless they are confident they can get another one soon. The quit rate rose to 2.0% from 1.8%, so it is now back to around levels comparable to before the financial crisis. This is an encouraging bit of news for the US labor market. Nonetheless, long-dated US Fed funds rate expectations were down 3.5 bps.

Today’s indicators: During the European day, preliminary GDP data for Q3 are coming out from France, Germany and the Eurozone as a whole. Eurozone’s preliminary GDP for Q3 is expected to have expanded a mere 0.1% qoq from a stagnating Q2. The recent disappointing German factory orders and industrial production in September increase the possibility for a below-consensus reading. EURUSD has been trading in a tight range in the last couple of days ahead of the GDP figures. A weak number could be the catalyst to push the pair below 1.2400 again, in my view.

Separately, Eurozone’s final CPI for October is expected to remain unchanged from its flash estimate of 0.4% yoy.

From the UK, construction output for September is forecast to rise, a turnaround from August.

In Canada, we get manufacturing sales for September.

In the US, retail sales for October is forecast to rise 0.2% mom, a turnaround from -0.3% mom in September. Similarly, retail sales excluding the volatile items of autos and gasoline are expected to have risen, a rebound from the previous month. After last month’s unexpected drop, a rebound could strengthen USD. The preliminary University of Michigan consumer confidence sentiment for November is also coming out.

As for Friday’s speakers, the talkative ECB Executive Board member Benoit Coeure speaks again, as well as St. Louis Fed President James Bullard and Fed Vice Chairman Stanley Fischer.

The Market
EUR/USD still in a symmetrical triangle

EUR/USD remains capped below the 50-period moving average and within the symmetrical triangle formation. There were a couple of attempts to break the near-term trend line, but none of them found much support. The directionless movement of the pair reflect investors’ concerns ahead of today’s Eurozone’s GDP figures. The recent data suggest that growth in the bloc is slowing, which could trigger the breakout and set the direction of the pair. Usually symmetrical triangles are thought of as a continuation pattern and a break in either direction is likely to determine the near-term bias. Given the sluggish growth outlook for the bloc, this put more chances of a downward breakout, in my view.

• Support: 1.2360 (S1), 1.2300 (S2), 1.2250 (S3).

• Resistance: 1.2535 (R1), 1.2620 (R2), 1.2745 (R3).

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