The Great Game 2.0
As we wrote in our last blog, the lack of hard economic statistics scheduled to be released last week- aside from Canadian jobs numbers, more below – meant that politics and trade developments dominated markets. This is not necessarily a good thing. Let’s take a closer look at what transpired.
In the True North, hopes for a new NAFTA agreement in place this year seemed to fade, as May 18th appears to be the near-term deadline. Considerable progress has reportedly been made by all three parties, but time is running short. Failure to secure an agreement-in-principle before the above-mentioned date would likely see the issue shunted off until the mid-term Congressional elections in November are over, which means consideration in 2019 at the earliest. This somewhat negative development didn’t hurt the loonie very much, as excellent employment numbers buoyed the currency. The Canadian economy lost a net of -1.2K jobs which hid a strong breakdown: Full-time +28.8K / Part-time -30.0 with the rate holding steady, as predicted, at 5.8%. Mr. Market initially hit CAD on the net jobs, then rallied the currency on the jobs breakdown.
We spoke with our friend the bond salesman who pointed out that, with bond yields rising stateside, Canadian bond yields should be rising in lockstep, otherwise the loonie would be taking a hit. Given that CAD is continuing to hold firm, Canadian bond yields must indeed be rising – and they are.
Bond yields have more than doubled over the past year and, with growth quickening in America and vast deficits emerging from Washington, bond yields look set to rise further, further pressuring the Bank of Canada into actions they may not necessarily want to do (Time to Mix Things Up, May 7th).
Over in Cool Britannia, the only item of note was the Bank of England standing pat on rates. The vote was 7-2 and not terribly surprising as the British economy had been showing some signs of weakness in recent weeks. Additionally, the BREXIT uncertainty is still overshadowing politics in the UK so BOE Governor Mark Carney probably wanted to leave things be.
US president Donald Trump had an interesting week, and certainly appears to be playing the Great Game 2.0 with gusto. Aside from bringing three hostages home from North Korea and arranging a summit in Singapore June 12th with Kim Jong-un, leader of the Hermit Kingdom, to discuss ending the Korean War and removing nuclear weapons from the Korean peninsula – all remarkable achievements which eluded his predecessors – Mr. Trump also exited the controversial nuclear agreement with Iran. Strategic analysis of these historical developments is beyond the scope of this blog; we will examine market impacts while noting that Mr. Trump appears, evidently, to have allied America with the reform government of the Kingdom of Saudi Arabia (KSA).
Obviously, the two markets most affected by these developments in the Middle East are crude oil and the USD. As we have mentioned before, the greenback was extremely oversold earlier this year and had been due, even overdue, for a bounce stronger which has been ongoing for several weeks now. That rally may have been ended by the Iranian business. Simply put, oil rallied on sanctions being re-imposed on Iranian oil exports – a negative for USD. Additionally, airstrikes by Israeli forces inside Syria caused a flight to safety by investors, who purchased US treasury bonds. The subsequent rally in bond prices, which had been falling recently with a corresponding rise in yields, put further downward pressure on the greenback which had already been hurt by rising crude prices. Kind of a double-whammy so to speak.
Regardless, the so-called ‘OPEC Paradox’ made an appearance. (Rising crude prices spur rising production causing lower prices). With crude prices firming as a result of diminished overseas stockpiles and newly-restricted supply from Iran, American frackers have ramped up domestic production.
Daily US crude production is now north of 10.7 mln bbl/day and will relieve some price pressure arising from Iranian crude sanctions.
The bottom line appears to be that there should be sufficient oil supplies to satisfy demand for now. Further, as things become clearer in the Middle East, players can begin positioning themselves for what may be very positive future developments in the region and elsewhere. Mr. Trump has set the Great Game 2.0 in motion; only time will tell if things work out as hoped.
The coming week sees a mix of secondary numbers on both sides of the border, as well as a plethora of Fed speakers.
Key Data Releases This Week
|MONDAY, MAY 14|
|21:30||AUD||Monetary Policy Meeting Minutes|
|TUESDAY, MAY 15|
|04.00||GBP||Average Earnings Index 3m/y||2.7%||2.8%
|08:30||USD||Core Retail Sales m/m||0.5%||0.2%|
|USD||Retail Sales m/m||0.4%||0.6%|
|21:00||AUD||Wage Price Index q/q||0.6%||0.6%|
|WEDNESDAY, MAY 16|
|08:00||EUR||ECB President Draghi Speaks|
|10:30||USD||Crude Oil Inventories||-2.2M|
|12:00||CHF||SNB Chairman Jordan Speaks|
|22:00||NZD||Annual Budget Release|
|FRIDAY, MAY 18|
|CAD||Core Retail Sales m/m||0.0%|
DAVID B. GRANNER
Senior FX Dealer,
Global Treasury Solutions