Oil Volatility, Central Bank Comments and G20 to Spark Global Cooperation
The USD had mixed results versus major pairs during the past week. The greenback advanced against the EUR, GBP and CHF but the turnaround in commodities boosted the AUD, NZD and CAD with the JPY also appreciating versus the USD thanks to safe haven flows. The biggest event this week on the forex calendar was the release of the Federal Open Market Committee (FOMC) January meeting minutes. The notes showed Fed members are concerned about economic developments abroad but confident on U.S. growth the biggest takeaway for investors was that although the March FOMC meeting rate hike appears to be dead on arrival, the probabilities of at least 1 rate raise this year are back on.
Most central banks skipped February and will return to action in March. The European Central Bank (ECB), the U.S. Federal Reserve and the Bank of Japan (BOJ) will use conventional, unconventional and all the rhetoric they can muster to achieve their individual objectives. Cooperation has been hinted at by the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development this week as a way out of the global economic conundrum. The Group of 20 meeting at the end of this week should spark a more unified response to what remains a global crisis.
The price of energy has been more stable after the joint announcement of a production freeze by the Organization of the Petroleum Exporting Countries (OPEC) and Russia. The details are scarce and although Iran supports the agreement in principle they are likely not to follow through as they want to at least match their pre-sanction production levels. Commodity currencies have been linked to the price of crude ups and downs and will remains heavily correlated as long as a clear agreement is reached or there are positive signs of rising demand.
OPEC Oil Agreement Good First Step
The price of West Texas crude has climbed above $30 this week after the OPEC-Russia announcement to freeze production output. The on-again-off-again deal that has been in the works for weeks although you would not know it from the noncommittal comments from Saudi Arabia and Russia has finally materialized, or at least officially appears to be on. The problem is that the agreed ceiling for combined production is at January 2016 levels of production, which for most of OPEC nations are record high levels. Iran who had to decrease output due to sanctions is pumping at close to half to 2011 levels and is not likely to agree to the freeze as it has now dealt its way out of sanctions. As the world fourth largest reserves it needs to double their current production to match pre sanction levels which would still leave it behind other OPEC members who have picked up the slack left by Iran’s absence.
The price of crude has advanced this week although it has not been a linear progression. The different interpretations of the agreement and back and forth versus OPEC members have created a 12.34 percent gap between the high and low of the week. Brent has advanced 0.082 percent, while WTI posted a 2.39 percent rise from during the week.
The stability in the price of energy has helped commodity currencies. AUD, NZD and CAD are all positive versus the USD this week even as those economies struggle with weaker economic fundamentals. A stable price for a barrel of crude is doing more as a bottom appears to have been reached which will end the compound effect those economies were suffering with their own growth slowdowns.
Central Bank Words and Actions Beat February Sleepy Expectations
February was supposed to be a quiet month for central banks as major policy bodies would be skipping the month after January was full of action and rhetoric. The highlight for January was the surprise announcement of negative rates from the BOJ. February continues to be full of verbal intervention as the minutes from the FOMC and the testimonies from Fed Chair Janet Yellen brought to light the concerns of policy members even though they voted unanimously in December to raise rates. The Bank of Mexico delivered the surprise action with a 50 basis points rate hike in an extraordinary meeting, two weeks after the regular meeting had kept the rate unchanged. A rapid depreciation of the peso and inflation concerns the main factors. The MXN is used as a proxy for emerging markets and as such has depreciated more than the BRL and the ZAR even though the Mexican economic fundamentals are stronger.
Going forward there is a lot of anticipation on March central bank actions or lack of them. The Mexican Central Bank is a prime example of going all in to defend a currency, and at least 2 days after the fact it has been a success, yet hard to say in the mid term as headwinds could attack the currency again despite the work of Banxico. The ECB actions in December were considered a half measure and the EUR went against the central bank wishes reducing European competitiveness. The ECB continues to be divided on the next step as Germany is not sold on stimulus and the rest of Europe cannot make austerity work. An expansion of quantitative easing in terms of length or amount would be a good start, but the outlook is not clear on what Mario Draghi will be able to deliver.
The Fed is expected to leave the Fed funds rate unchanged in March. The global economy did not have a great start of the year. The forecasts done in December will not hold up to the reality of 2016 and the Fed will need to update their outlook and change the expectation of 4 rate hikes to 2 or less this year.
G20 Looking for Cooperation not a Plaza Accord
The group of 20 meeting in Shanghai will focus on the Chinese slowdown, the energy price tumble and U.S. monetary policy according to Japanese Finance Minister Taro Aso. The market has entertained the rumour that a Plaza Accord type cooperation agreement has been planed, but those rumours were stamped out by China’s Finance Minister Lou Jiwei. The IMF and the OECD have called on the 20 largest economies to sit down and come to an agreement on how to reverse the global slowdown. The diverging paths taken after the Fed broke ranks with central banks that build a low rate environment has unshackled volatility but at the cost of market confidence. There is no doubt that the Finance ministers and central bankers will discuss current macro events in a hope to find a way to boost global growth, but always with a regional goal in mind.
The FX economic calendar does not bring any major releases this week. Oil inventories and U.S. unemployment claims should give some insight into market direction but it will be talk of cooperation that could boost the FX market as well as more details on the OPEC-Russia agreement on the commodities side.
FX Market events to watch this week:
Tuesday, February 23
4:00am EUR German Ifo Business Climate
6:15am CHF SNB Chairman Jordan Speaks
10:00am USD CB Consumer Confidence
Wednesday, February 24
10:30am USD Crude Oil Inventories
7:30pm AUD Private Capital Expenditure q/q
Thursday, February 25
4:30am GBP Second Estimate GDP q/q
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, February 26
8:30am USD Prelim GDP q/q
G20 Meeting All Day