Keith Underwood 13 Comments

OPEC – Organization of Poor Examples of Coordination

Ho hum. The latest agreement out of OPEC is a proposed reduction of 800,000 barrels per day. Handily, the actual specific details of the reduction has yet to be finalized and that leaves who, what, where, when, and how to be sorted in November. Let’s see what can be agreed in a warring region of the world where trust is at a low and adherence to production limits are historically slippery for some.

 

800,000 may be an overly optimistic cut given that Iran has only just agreed to join the discussion. They have refused, on several previous attempts; to even show up to talks. Other oily actors like Russia seem intent to play ball by their own rules, so don’t plan for anything that doesn’t benefit them. As a non-Opec member they are likely to not participate in a reduction. Even if they did would you believe them?

 

Should Opec succeed in their production cut theatrics and sustain a higher price of $55-$60 per barrel, the higher oil price will encourage shale producers to dust off the projects that were uneconomical while oil was below $40-$45 per barrel. The higher the price goes the more potential supply realized by projects left idle before.

 

So what’s this have to do with the foreign exchange market you ask? Well, while all this hoopla is going on we will see increased headline trading (quick, sharp, short movements) in spot FX with currencies that are correlated to the price of oil. Correlation is the generalized movement of one asset versus another (either positive or negative). So if oil increases in value you might see an increase or strengthening of the Canadian dollar (oil exporter) versus a country that is a consumer (importer) of oil such as the European Union or Japan. Other exporters that could also benefit are Russia, China, Brazil and Mexico.

 

Oil has been trading sideways all year long (see chart) and anytime you have a prolonged period of consolidation or range trading, the breakout move (out and away from the previous range) will be that much greater and volatile. Think of a Jack-in-the-box toy that is wound and wound and wound until it pops. This is typically what happens the longer that a tradable asset stays within a predefined or preexisting range. Oil could be in this type of situation, but so too are many other tradable assets, due to concerted government intervention in the interest rate markets keeping rates low or even negative, for longer. See ‘Negative Interest Rates: A Disincentive to Risk’ for my pessimistic views on negative rates.

Trading range oil 2016

As such, the inflection points or ranges that has developed over months and years will ultimately break and bring with it severe liquidity shortages and violent gapping movements. Could OPEC produce a breakout moment with a viable and substantial agreement to cut production? My opinion is that they could, but we have been down this path many, many times before and I can’t really get that excited about a re-run where there is no real emergency for the cartel members to act. Expect a bland communiqué that expresses dismay at the present low price of oil, the need to keep the global economy growing (to use more oil) and production cuts that will be in the best interest of the cartel.

 

keith@underwoodfx.com 

Traded Markets Intelligence

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Keith Underwood 2 Comments

3 Things to consider about the August NFP @ +173,000

  • Revisions to June and July NFP figures of +44,000 brings the 3 month average gain to +221,000
  • Average hourly earnings are up 0.56% since June and up 2.2% from August 2014
  • August NFP of +173,000 is 30% below the 12 month average gain of +247,000

 

Looking through the lens of the FED, there are positives and negatives about today’s NFP release. On the face of it, a sub-200k number is a slight cause for concern, as the bobble heads will stoke a return Read more

Keith Underwood No Comments

The FOMC Passes On A June Rate Rise

The Federal Reserve released the April FOMC statement which essentially restates that the committee will be data dependent in its decision to normalize rates and that the economy still has an opportunity to improve.

If one only were to look at the comparison between the March and April statements (March is italicized), it is easy to read that the economic signals are mixed and that their expectations are

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Notable events the week of 6th April 2015

Opening pitch of the 2015 Major League Baseball season is 8 p.m. EST Sunday, April 5 between the Cardinals and the Cubs and the 28 remaining teams will open the season on April 6.  After this past winter in the Northeast, baseball is a welcome sign of the impending warmer weather that is long overdue.  I make no predictions on the World Series other than to say Go Yankees!

Monday the 6th:

Japan Leading indicator (Prelim.) index 104.9 exp. versus 105.50 prior

US Fed’s Dudley Speaks on Economic Outlook in New Jersey

Canada Ivey PMI index 49.5 exp. versus 49.7 prior

US ISM Non-Manufacturing index 56.6 exp. versus 56.9 prior

 

Tuesday the 7th:

New Zealand RBA overnight rate 2.25% exp. versus 2.25% prior

Spain, France & Germany Services PMI

Eurozone Composite PMI index 54.1 exp. versus 54.1 prior

Eurozone Services PMI index 54.3 exp. versus 54.3 prior

UK CIPS/Markit Servies PMI index 57 exp. versus 56.7 prior

Eurozone PPI %m/m -0.7 exp. versus -0.9 prior

US Fed’s Kocherlakota speaks in North Dakota

 

Wednesday the 8th:

Japan BoJ Policy statement and Governor Kuroda press conference

German factory orders (sa) %m/m 1.5 exp. versus -3.19 prior

Swiss CPI %m/m 0.1 exp. versus -0.3 prior

US Fed’s Dudley speaks on monetary policy in New York

Canada Minister Olivers to speak on state of the Canadian  economy

Japan BoJ MPC- Overnight rate % 0.1 exp. versus 0.1 prior

 

Thursday the 9th:

German industrial production %m/m 0.1 exp. versus 0.6 prior

UK BoE Monetary policy committee meeting and rate decision

UK BoE MPC – APF total 375 bn exp. versus 375 bn prior

UK BoE MPC – Base rate % 0.5 exp. versus 0.5 prior

Canada Building permits %m/m 8.5 exp. versus -12.9 prior

Canada House price index %m/m 0.1 exp. versus -0.1 prior

US Initial claims 278k exp. versus 268k prior

 

Friday the 10th:

China CPI %y/y 1.3 exp. versus 1.4 prior

China PPI %y/y -4.7 exp. versus -4.8 prior

Swiss Unemployment 3.2% exp. versus 3.2% prior

France Industrial production %m/m -0.5 exp. versus 0.4 prior

France Manufacturing production %m/m 0.0 exp. versus -0.1 prior

UK Industrial production %m/m 0.3 exp. versus -0.1 prior

UK Manufacturing production %m/m 0.3 exp. versus -0.5 prior

Canada Housing starts 170k exp. versus 156.3 prior

Canada Net change in employment -10k exp. versus -1k prior

US Fed’s Lacker speaks on economic outlook in Florida

US Import price index %m/m -0.6 exp. versus 0.4 prior

US Fed’s Kocherlakota speaks in Minnesota

Keith Underwood No Comments

US March Nonfarm Payrolls Dissapoints

Total US nonfarm payroll employment rose by 126,000 in February and the unemployment rate remained at 5.5%. Job gains continued in professional and business services, health care, and in retail trade. Revisions from the previous months where January was revised down from +239,000 to +201,000 and the change for February was revised from +295,000 to +264,000. With these revisions, employment gains in January and February were 69,000 lower than previously reported. This takes the 3-month average gains to just 197,000 per month, from 288,000 previously and ends the 12-month streak of job gains above 200,000 for the month.

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Notable events the week of 30th March 2015

Lots of data out this week but all eyes will be on the US employment figures due out on Friday.  Until then, one should expect range trading in currencies as Yellen’s speech on Friday provided little new information about when rates will rise and it’s all about upcoming wage growth and core consumer price data.

Monday 30th:

Eurozone business climate index 0.18 expected versus 0.07 prior

Eurozone consumer sentiment index -3.7 expected versus -3.7 prior

Eurozone economic sentiment index 103 expected versus 102.1 prior

German CPI (Prelim.) %m/m 0.4 expected versus 0.9 prior

German HICP (Prelim.) %m/m 0.5 expected versus 1.0 prior

US Personal income %m/m 0.3 expected versus 0.3 prior

US Personal spending %m/m 0.2 expected versus -0.2 prior

US Fed’s Fischer speaks on monetary policy and stability in Georgia

Tuesday the 31st:

German retail sales %m/m -0.7 expected versus 2.3 prior

German unemployment change -14k expected versus -20k prior

UK GDP (3rd est.) 0.5 expected versus 0.5 prior

Eurozone flash HICP %y/y -0.1 expected versus -0.3 prior

Eurozone Unemployment 11.2% expected versus 11.2% prior

US Fed’s Lacker speaks on economic outlook in Richmond

US S&P Case-Shiller home price %y/y 4.6 expected versus 4.46 prior

US Chicago PMI index 52.4 expected versus 45.8 prior

US Consumer confidence index 96.6 expected versus 96.4 prior

Japan Tankan index 14 expected versus 12 prior

Wednesday the 1st:

China PMI Manufacturing index 49.7 expected versus 49.9 prior

China HSBC/Markit PMI Manufacturing index 49.3 expected versus 49.2 prior

French Manufacturing index 48.2 expected versus 48.2 prior

German Manufacturing index 52.4 expected versus 52.4 prior

Eurozone Manufacturing PMI index 51.9 expected versus 51.9 prior

US ADP employment survey 230k expected versus 212k prior

US Manufacturing PMI index 55.1 expected versus 55.3 prior

US ISM Manufacturing index 52.5 expected versus 52.9 prior

US Vehicle sales 16.9mm expected versus 16.16mm prior

Thursday the 2nd:

UK CIPS/Markit construction PMI index 60.4 expected versus 60.1 prior

US Initial claims 285k expected versus 282k prior

Friday the 3rd:

US Non-farm payrolls 250k expected versus 295k prior

US Private payrolls 245k expected versus 288k prior

US Unemployment 5.5% expected versus 5.5% prior

 

Keith Underwood No Comments

The Top 3 Reasons Greece Will Remain in the Eurozone

Consider the old adage of real estate where location, location, location are the sole determination of a property value. Now ponder the situation that the Eurozone finds itself in with the poor southern country of Greece. Long a basket case economically with it’s reliance on tourism and the joke of a tax system, Greece will not be leaving the Eurozone, even though it probably should get the boot. No, Greece will stay in the Eurozone because of politics, politics, politics.

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Notable events the week of 23rd March 2015

Expect more headline trading this week with a plethora of Fed speakers littering the calendar and Bullard, the loose cannon) speaking twice this week (see below).  The best one is saved for last though, as Yellen speaks on Friday afternoon, near the close of the market.  I would imagine that weekend gamma will be expensive, due the timing of this speech, and the potential for the Yellen cake hole cannon to let loose.

 

Monday the 23rd:

US Fed’s Mester speaks in Paris

US Existing home sales 4.94m expected versus 4.82m prior

US Fed’s Williams speaks on economic outlook

US Fed Vice Chair Fischer speaks in New York

Tuesday the 24th:

China Flash HSBC/Markit PMI manufacturing index 50.4 expected versus 50.7 prior

Eurozone Flash Composite PMI index 53.6 expected versus 53.3 prior

Eurozone Flash Manufacturing PMI index 51.5 expected versus 51 prior

Eurozone Flash Services PMI 53.9 expected versus 53.7 prior

UK CPI %m/m 0.3 expected versus -0.9 prior

US Fed’s Bullard speaks on Global Recovery in London

US CPI %m/m 0.1 expected versus -0.7 prior

US CPI %m/m (ex food & energy) 0.1 expected versus 0.2 prior

US Flash Manufacturing PMI index 54.7 expected versus 55.1 prior

US New home sales 475k expected versus 481k prior

Wednesday the 25th:

German IFO Business climate index 107.3 expected versus 106.8 prior

German IFO Current conditions index 111.8 expected versus 111.3 prior

German IFO Expectations index 103 expected versus 102.5 prior

US Fed’s Evans speaks on the economy & monetary policy in London

US Durable goods orders %m/m 0.5 expected versus 2.8 prior

Thursday the 26th:

US Fed’s Bullard speaks on US Economy & Policy in Frankfurt

Eurozone M3 Money supply %y/y 4.3 expected versus 4.1 prior

UK Retail sales (ex auto, fuel) %m/m 0.3 expected versus -0.7 prior

US Initial claims 295k expected versus 291k prior

US Fed’s Lockhart speaks on Economy & Monetary Policy in Detroit

Canada BoC’s Governor Poloz to give speech

Japan CPI Core (nation) %y/y 2.1 expected versus 2.2 prior

Japan Real Household Spending %y/y -3.2 expected versus -5.1 prior

Japan Unemployment % 3.5 expected versus 3.6 prior

Japan Retail Sales %m/m 0.9 expected versus -1.9 prior

Japan Retail Sales %y/y -1.4 expected versus -2 prior

Friday the 27th:

US GDP Annualized (3rd est.) %q/q ann 2.4 expected versus 2.2 prior

US University of Michigan sentiment index 91.8 expected versus 91.2 prior

US Fed’s Yellen speaks on Monetary Policy in San Francisco

ACurrencyAffair.com  Quick, discreet, and so worth the risk.

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GOT GAMMA?

It is hardly surprising the moves of late in the currency markets in the run up to the Fed announcement, and at the conclusion of their two-day meeting. With short-dated gamma (rate of change of your delta exposure) at a premium, the pull back of the dollar post Fed removal of the word patient from their statement was severe, with a 4% move higher in EUR/USD. The market moved to where the most pain was centered, which were stop/loss orders higher up, in a market where almost everyone is short. So, during the NY afternoon when liquidity is not great, a lot of those who were short EUR/USD got stopped out of their positions, and a lot of people who sold into this rally were also stopped out. It was arguably a tough day for most spot dealers who have a decent order book and just about anyone else with a Euro position.

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Notable events the week of 16th March 2015

Monday the 16th:

US Empire State Survey index 8 expected versus 7.78 prior

US Capacity Utilization 79.5% expected versus 79.4% prior

US Industrial Production %m/m 0.2 expected versus 0.2 prior

US NAHB Builders Survey index 57 expected versus 55 prior

ECB President Draghi Speaks in Frankfurt

Tuesday the 17th:

Eurozone HICP %m/m 0.6 expected versus -1.6 prior

Eurozone ZEW (Economic Sentiment) index 53.4 expected versus 52.7

German ZEW (Current Conditions) index 52 expected versus 45.5 prior

German ZEW (Economic Sentiment) index 59.5 expected versus 53 prior

US Housing Starts k 1050 expected versus 1065 prior

ECB’s Nouy Speaks in Frankfurt

US Federal Reserve FOMC meeting

Wednesday the 18th:

UK BoE MPC minutes released

UK Claimant Count Change -32.5k expected versus -38.6k prior

UK ILO Unemployment Rate 5.6% expected versus 5.7 prior

US FOMC – Fed Funds Rate 0.25% expected versus 0.25% prior

Thursday the 19th:

US Initial Claims 305k expected versus 289k prior

US Leading Indicator %m/m 0.3 expected versus 0.2 prior

US Philadelphia Fed Survey index 8 expected versus 5.2 prior

Friday the 20th:

German PPI %m/m 0.2 expected versus -0.6 prior

Canada CPI %m/m 0.7 expected versus -0.2 prior

Canada Retail Sales %m/m -0.5 expected versus -2 prior

Fed’s Lockhart Speaks on Monetary Policy in Georgia

Fed’s Evans Speaks on Monetary Policy in Georgia

A Currency Affair

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Keith@UnderwoodFX.com