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Oil Rips Higher And The Australian Dollar Is Above 77 Cents

Published 20/10/2016, 11:23 am
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Originally published by AxiTrader

Quick Recap

Another big draw in crude oil inventories and the sooth words of the Saudi Oil minister have help oil prices pop to new highs. That has helped energy stocks in the US propelling the market higher again and supporting the reflation trade.

That in turn has helped push the Australian dollar up and through 77 cents where it sits this morning in what has recently been the supply zone and an area where most pundits believe the Australian dollar’s run will stall. We’ll see but it strikes me that everyone is looking the other way again.

What You Need To Know

International

  • It’s not a spectacular rise in stocks across Europe and the US. But it is a solid rise again with better earnings reports so far continuing to drive a lift in expectations about corporate health in the US. At the close the Dow Jones Industrial Average is up just 0.22% which is a little disappointing for the bulls all things considered. The Nasdaq 100 is up 0.05% (dragged a little by the intel results) and the S&P 500 is up 5 points at 2144.
  • The Fed’s Beige Book is out in the lead up to the November FOMC meeting and the key takeaway is that the labour market is tight and the outlook for the economy is on balance positive. But “Most Districts characterised input costs and/or output prices as fairly flat, but prices increased slightly on net” the BBook says. That combination suggests the Fed is likely to tighten in Decmebr but can still run the economy as hot as Janet Yellen wants.
  • Earnings were again on balance better than expected.
  • The Bank of Canada left rates on hold at 0.5% but cut its growth rates outlook for the economy to 1.1% for 2016 and 2% in 2017. Both years saw growth cut by 0.2%. The bank doesn’t expect Canada’s output gap to close (stupid concept, but moving on) until 2018.
  • UK Chancellor of the Exchequer Phil Hammond reiterated overnight that the Bank of England will remain independent and that the British government has no plans to change the way interest rates are set in the UK. But one thing he is going to have to try to change is the plunge in confidence about the outlook for the UK economy with pessimism about the outlook jumping from 37% to 53%. Britain might talk itself into a recession.
  • Lots of chatter in markets about China’s remarkable GDP print yesterday of 6.7% for third quarter growth. That was right on the markets expectations but strangely it was the third print in a row where growth printed 6.7%. That’s raised questions about the smooth of growth and increased concerns about the data being made up and somewhat rubbery. Capital Economics Julian Evans-Pritchard said “It's quite implausible that growth would be 6.7% for three straight quarters. They're obviously smoothing the data quite a bit”. Perhaps.
  • But the data that is printed is the data of record and the data we have to deal with as traders and what is clear in all the partials (except last week’s trade) is that the Chinese economy defied the doomsayers in 2016 and has continued to be well supported by government reflation efforts.
  • Saudi Arabia completed it first debt sale with a bumper $17.5 billion of 5, 10 and 30 year bonds overnight. The Kingdom achieved some pretty solid margins. That’s especially the case for the 30 year bond which had a margin of 210 over US Treasuries. The 5s were at UST +135 while the 10s issued at UST +165

Australia

  • It should be another good day for the local market today as long as the release of the September jobs data doesn’t throw a spanner in the works. That’s after yesterday’s 24 point rally to 5435 and with the December SPI futures pointing to a 15 point rally on the open.
  • Given the rally in energy, basic materials, and financials in the US overnight we should see a pretty broad based rally on the ASX today. The question, the big one is just how far the market can run. Yesterday talking to Leanne on Sky I said I was bullish and the physical market, having dipped to 5380 (a garden variety pullback) I thought we could run back toward 5500 and then reassess. I retain that view.
  • But of course today’s jobs report will be important. The market is looking for a rise in jobs of 15,000 and the unemployment rate to tick up to 5.7% from last month’s 5.6%. There is some risk of a boom time number the NAB’s economics team believes as the natural rate of growth combines with the ABS sample rotation measures. They have pencilled in a rise of 30,000 jobs for the month.
  • Also out today will be the NAB’s bigger quarterly business survey. That will be far less market moving but it will give important information on the state of the economy.

Forex

  • USD/JPY continued its pullback overnight and is back at 103.40. That’s no surprise as I’ve been highlighting in my videos given that the price was unable to break up an through the 104.70 region on multiple occasions. This level is a minor Fibonacci level but one that clearly many have been looking at. Last night’s low was bang on my fast moving average which often offers initial support on a reversal but a break of 102.95 (20 points below last night’s low) would signal a deeper move.
  • The EUR/USD is under pressure both against the pound and the US dollar. It’s down at support from the other night at 1.0960 and as noted earlier this week a break of that level would usher in a move to 1.0780. The Brexit low of 1.0905 is also an important level to watch. What the ECB says and does tonight will determine whether Euro breaks substantially lower.

Chart

  • Looking closer to home the AUD/USD is back above 77 cents for the first time in 5 weeks. There is a clear change in sentiment for the Aussie if traders are still buying when they know there is so much supply and overhead resistance in this 77/7850 region. That in itself is instructive. I’ll talk more about this in my AUDUSD specific piece a little later this morning.

Commodities

  • Crude Oil was all about the drawdown last night with EIA stocks falling 5.2 million against 2.7 million expected. That’s pushed WTI up 2.78% to $51.69 and helped Brent Oil rises 2.2% to $52.82. It’s also helped prices break up and through the highs we saw back in June. That break will embolden the bulls.
  • Perhaps more tellingly though Saudi Oil Minister Kalid al-Falih was pretty upbeat at a London conference overnight saying that producer actions would help the oil market which was at the end of the downturn. “Market forces are clearly working after a testing period of sub-$30 prices. The fundamentals are improving and the market is clearly balancing the supply and demand equation” he said.
  • Which leaves me stopped out of my WTI short.

Chart

  • Gold made a high of $1274 last night and its back at $1268 now. That was largely on the mildly weaker US dollar and what seems to have been the technical reversal we’ve been looking for. There is a chance of further gains as inflation comes back onto the horizon with the oil price rise if it can be sustained. But for the moment this seems more like a technical move.

Chart

  • Copper is at $2.10 after the Chinese data yesterday was as expected.

Today's key data and events (all times AEDT)

  • Australia - National Australia Bank's Business Confidence (QoQ) (Q3), Employment Change s.a. (Sep), Part-time employment (Sep), Fulltime employment (Sep), Participation Rate (Sep), Unemployment Rate s.a. (Sep) (11.30am)
  • New Zealand - Nil
  • China - Nil
  • Japan - Foreign bond investment (Oct 14), Foreign investment in Japan stocks (Oct 14) (10.50am)
  • Germany - Producer Price Index (MoM) (Sep), Producer Price Index (YoY) (Sep) (5pm)
  • EU - Current Account s.a (Aug), Current Account n.s.a (Aug) (7pm); ECB Interest Rate Decision (Oct 20), ECB deposit rate decision (10.45pm); ECB Monetary policy statement and press conference (11.30pm)
  • UK - Retail Sales ex-Fuel (MoM) (Sep), Retail Sales ex-Fuel (YoY) (Sep), Retail Sales (MoM) (Sep), Retail Sales (YoY) (Sep) (7.30pm); 10-y Bond Auction (n/a); CBI Industrial Trends Survey - Orders (MoM) (Oct) (9pm)
  • Canada - Nil
  • US - Initial Jobless Claims (Oct 14), Continuing Jobless Claims (Oct 7) (11.30pm); Philadelphia Fed Manufacturing Survey (Oct) 911.30pm); Existing Home Sales (MoM) (Sep), Existing Home Sales Change (MoM) (Sep), CB Leading Indicator (MoM) (Sep) (1am); EIA Natural Gas Storage change (Oct 14) (1.30am)

Have a great day's trading

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