Central Bank Policy, the OPEC Meeting and NFP to pack FX Agenda
The U.S. Memorial Day weekend will shorten the trading week and compress employment releases in a week that is already filled with major events. The Organization of the Petroleum Exporting Countries (OPEC) will meet in Vienna on Thursday and that day the European Central Bank (ECB) will publish its rate statement and forecasts. The U.S. will release its employment indicators as well as manufacturing and non-manufacturing PMIs in a week that could make or break the possibility of a June Federal Open Market Committee (FOMC) meeting interest rate hike.
The European Central Bank (ECB) is not expected to change monetary policy when it releases its statement on Thursday, June 2 at 7:45 am EDT. The market will be following ECB President Mario Draghi speech for details about the implementation of corporate bond purchases that will kick off in June but the only surprise on the agenda could be the ECB’s forecasts. March’s forecasts were put together using the horrible beginning of the year data, which has improved and before the quantitative easing additional stimulus announced in the same time the forecasts were published. The inflation forecast could rise to 1.6 percent next year, putting less pressure on the ECB to ease monetary policy.
The USD economic calendar kicks off on Tuesday, May 31 with the release of the Consumer Confidence data at 10:00 am EDT. the ISM manufacturing PMI will be released on Wednesday, June 1 at 10:00 am EDT. The ADP private payrolls will be published on Thursday, June 2 at 8:15 am EDT to kick off the employment data a day later than usual due to the U.S. holiday on Monday. U.S. unemployment claims will be release that same day at 8:30 am EDT. The biggest indicator in forex, the U.S. non farm payrolls (NFP) will be released on Friday, June 3 at 8:30 am and followed by the ISM non-manufacturing PMI at 10:00 am EDT. The last NFP before June gains extra importance after the minutes from the April FOMC hinted that the Fed could hike rates if the U.S. economy showed signs of a rebound after a weak first quarter.
ECB to Keep Rate Unchanged Give More Details on Bond Purchases
The European Central Bank (ECB) is heavily anticipated to keep the interest rate unchanged at 0 and the deposit rate at -0.40 percent. The central bank delivered two massive QE announcements to a market that for the most part moved against them as either the ECB under delivered to expectations, or in the case of March over delivered but had Draghi comment on the limits of what the central bank was willing to do. The announcements in March of corporate bond purchases as part of the increase up to 80 billion EUR in QE is still to be defined. Forecasts are believed to be improved across the board as economic conditions are better than those in January on which the current forecasts were based. A positive week for the USD with strong economic indicators would lessen the pressure on the ECB to ease further to bring the EUR down to boost growth. The Fed June rate hike went from a long shot to a likely scenario in the last month.
The EUR/USD depreciated 0.91 percent in the last week. The pair is trading near weekly lows at 1.1117. The high of the week came on Monday at 1.1243 before a combination of Fed member comments and little data but mostly positive was published. Next week will be a stark contrast with wall to wall events driving the forex market.
OPEC Rifts and New Leadership Expected in Vienna
The price of oil sits near a 8 month high after disruptions to the supply of crude have given the extra push above the $50 price level. Canadian wildfires, sabotage in Nigeria and the French oil sector strike have reduced the amount of oversupply. Yet those disruptions are temporary and producers keep pumping at record high levels. The Organization of the Petroleum Exporting Countries (OPEC) will meet in Vienna in a time when even the existence of the group is heavily questioned and some of its biggest critics are the members themselves.
2016 began with rapid depreciation of energy prices after investor anxiety was triggered by events in the Chinese stock market. As prices stabilized there was a growing rumour that played out in the financial press about Saudi Arabia and Russia in talks to agree to freeze production. Both parties offered statements to feel the other side, but those unofficial conversations lead to a meeting in Doha to sign the oil production freeze agreement. In attendance were OPEC members plus Russia, Mexico and five other non-OPEC nations. The talks failed to reach the desired outcome. The main obstacle was Saudi Arabia’s insistence that Iran be part of the agreement. The Iranian oil sector has just had a western embargo lifted and is eager to get back to pre-embargo levels of production; and publicly always maintained that it would not be part of any freeze in output. The failure of the Doha oil deal did not have a massive impact on the markets because that same weekend a major supply disruption caused by a strike by energy workers in Kuwait created upward momentum for crude.
The rift between Saudi Arabia and Iran, OPEC’s biggest producers, has the market questioning why the organization exists in the first place and when they meet in Vienna on June 2 as it is expected that a replacement for current secretary-general, Abdalla Salem el-Badri will be announced. This will mark the first OPEC general meeting that the successor to longtime oil minister Ali al-Naimi was replaced by Deputy Crown Prince Mohammed Bin Salman with Khalid Al-Falih, the former head of Saudi Aramco.
It is clear that the OPEC needs Saudi Arabia, but the middle eastern nation seems to be wondering aloud if Saudi Arabia needs OPEC. Members like Venezuela are a perfect example of the highs and lows of oil price dependancy as the nation has been forced to ration electricity and has imposed a shorter work week as cost saving measures as the state’s revenue shrinks with lower crude prices.
Saudi Arabia favours a market share war driven by low oil prices, which are in turn hurting other members, but as long as the Saudi reserves and low cost production can keep them above water while other producers go under it will be considered a win. So far the strategy has borne fruit, the precocious state of shale in North America but the cost could be the end of OPEC. The last time the organization cut oil output was in 2008 as the financial crisis reduced demand for crude. The OPEC will start its meeting on Thursday, June 2 at 4:00 am EDT.
FX Market events to watch this week:
Monday, May 30
9:30pm AUD Building Approvals m/m
Tuesday, May 31
8:30am CAD GDP m/m
10:00am USD CB Consumer Confidence
9:00pm CNY Manufacturing PMI
9:30pm AUD GDP q/q
9:45pm CNY Caixin Manufacturing PMI
Wednesday, Jun 1
4:30am GBP Manufacturing PMI
10:00am USD ISM Manufacturing PMI
9:30pm AUD Retail Sales m/m
9:30pm AUD Trade Balance
Thursday, Jun 2
4:30am GBP Construction PMI
All Day ALL OPEC Meetings
7:45am EUR Minimum Bid Rate
8:15am USD ADP Non-Farm Employment Change
9:30pm EUR ECB Press Conference
9:30pm USD Unemployment Claims
11:00am USD Crude Oil Inventories
Friday, Jun 3
4:30am GBP Services PMI
8:30am CAD Trade Balance
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
10:00am USD ISM Non-Manufacturing PMI