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Daily Commentary 23/12/14

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Wrong about oil I had thought the technical rally in oil yesterday would last longer than it did, but in fact it started to falter by midday in Europe. After rising a dramatic 7.5% from Friday’s lows by midday in Europe, WTI finished the US day down about 5% from its opening levels in Europe (up a modest 1.4% from Friday’s lows). I guess traders agreed with me – the idea that the global economy will come to the rescue of oil markets is more of a hope than a strategy. Sentiment was hurt by more comments from the Saudi Arabian oil minister, who said OPEC would not cut production at any price (he mentioned USD 20 a barrel!). To make matters worse, the Iraqi oil minister said his country intended to boost output next year, increasing the glut on the market. The trend in the oil market is distinctly negative for the energy-related currencies – AUD, CAD, NOK and of course RUB – over the coming months. NOK was the worst-performing G10 currency yesterday.

Nonetheless, oil was recovering slightly in Asian trading this morning on expectations that Wednesday’s US inventories data will show a drawdown for the second week in a row. I still expect oil to become more of a two-way market for now as some short-covering is likely to come in at these low levels. That should increase volatility in the oil-related currencies.

RUB recovered substantially despite the fallback in oil prices. It appears that exporters are responding to government pressure to sell foreign currencies, especially as tax payment deadlines approach. Moreover the Russian FX market will be closed from Jan. 1st and only reopen on Jan. 12th, so investors shorting the RUB may be closing out their positions ahead of that time rather than take the risk along with the negative carry. I doubt though if this is the end of the story for RUB, as it looks like the price of energy – which makes up about two-thirds of the country’s exports — are not going to recover substantially any time soon.

Lower oil prices and a rising dollar pressured gold, which crashed through several support levels to trade near a three-week low. Who needs an inflation hedge now? And with US stocks rising into record territory (see below) and Chinese stocks doing well too, many investors see better things to do with their money.

Sight deposits at the Swiss National Bank (SNB) rose by only CHF 3.11bn or about 1% last week. This figure – cash-like holdings of commercial banks at the central bank – is a loose proxy for FX intervention. The figure was lower than expected, because analysts had assumed that only major intervention would have forced the SNB to impose negative deposit rates. (The December FX reserve data will be released on Jan. 7th.) The fact that the SNB imposed the negative rates in such circumstances shows their determination to keep the EURCHF floor intact. Swiss short-term yields fell further into negative territory as the market priced in further action from the SNB. Market confidence in the EURCHF floor is high and it seems to be as close to a one-way bet as exists in the FX world today.

The S & P closed up again for the fourth day in a row to hit a record high, by definition also a high for the year. Apparently this is the first year since 1928 (at least) that the market has not been down four days in a row! Such good performance makes investment professionals nervous – their starting point for 2015 is a record high and thus it may be difficult for them to deliver gains.

Today’s schedule: During the European day, we get the final GDP figures for Q3 from several countries. In France and the UK, the final Q3 GDP data are expected to confirm the preliminary growth figures. Following the concerns from the BoE MPC members over the heightened risk on growth in the Dec. meeting minutes, we could see a decline in the final Q3 growth rate. This could prove GBP-negative.

In Norway, the AKU unemployment rate for October is forecast to have remained unchanged at 3.7%. The official unemployment rate for the same month had remained unchanged, thus the possibility for a positive surprise is limited which could keep NOK under selling pressure.

We have a very busy day in the US with several important figures expected to show strong growth, which may boost the dollar. The 3rd estimate of Q3 GDP is expected to show that the US economy expanded at a faster pace than initially estimated. The 3rd estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have remained unchanged from the 2nd estimate. The monthly rate of the core PCE and PCE deflator for November are also coming out and the forecast is for both to decelerate a bit. Durable goods orders for November are forecast to be good: the headline figure is expected to accelerate, while the figure excluding transportation equipment is estimated to rebound from the previous month. Personal income and personal spending for November are also expected to accelerate, adding to the overall positive data. The Richmond Fed manufacturing index and the final University of Michigan confidence index, both for December are also coming out. The Federal Housing Finance Agency (FHFA) home price index for October and new home sales for November are likely to show that the housing sector is on a strong path. Overall, the strong data are probably going to show that the US economy is on a strong path. This is likely to keep the USD supported and confidence up.

Canada’s GDP for October is also due out.

On Tuesday Greece holds the second round of its Presidential election. Last week, the government’s candidate got only 160 votes, far below the 200 needed to win. He’s likely to lose today’s vote as well. The focus is therefore on the Dec. 29th vote when he only needs 180 votes to win and thereby avert a general election.

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