Sterling Continues to Run Higher and US Winter Storm Gives Oil Another Boost

Korea’s Kospi advanced 1.5%, and Australia’s ASX tacked on 1%. The Dow Jones Stoxx 600 gapped higher in Europe, led by energy, communications, and financials. US futures are trading firmly, though the cash market will remain closed. The US 10-year yield remains at 1.20%, but the pre-weekend rise dragged global yields higher. Australia’s 10-year yield jumped 10 bp to 1.31%, while most yields in Europe are 3-4 bp higher. The yield on the UK benchmark is up basis points to 0.58%.

The dollar is heavy. Sterling poked above $1.39 for the first time since April 2018. Among the majors, only the yen is not gaining on the dollar today. Most emerging market currencies are higher as well. The JP Morgan Emerging Market Currency Index is extending its advance for the seventh consecutive session. Rising yields have sapped gold’s luster, but it is consolidating within the pre-weekend range (~$1810-$1830). Oil prices continue to surge. At the end of January, March, WTI settled at $52.20 a barrel. It approached $61 today.

Asia Pacific

Japan, the world’s third-largest economy, expanded by 3% quarter-over-quarter in Q4 20, which surpassed expectations after a 5.3% expansion in Q3. Private consumption rose 2.2%, helped by a rise in government spending (2.0%). Business spending jumped 4.5% after contracting 2.4% in Q3. Net exports fared a little better than expected, rising 1% (rather than 0.9%), but off from the 2.6% gain in Q3. Inventories were reduced by 0.4%, without which growth would have been a bit stronger.

While mostly better than expected, the state of emergency that started last month warns of new economic hardship this quarter and another contraction. The emergency is expected to be lifted on March 7. Separately, a 7.3-earthquake was recorded over the weekend near Fukushima.

Australia’s most immediate challenge may not be emanating from China but from the large internet platforms like Google and Facebook. The Australian government is close to approving a plan that will require payment to new publishers, mandatory arbitration, and forcing notification when there is a significant change in the algorithms for searches. Google had threatened to withdraw, but with Canada, the UK, and EU considering similar measures, its threats to be a negotiating ploy.

That said, when it pulled out of Spain in 2014, one study found that traffic to news sites fell 10%. There is some pressure for the US to take similar action. Still, it appears a deal may be reached that may build on Google’s News Showcase product that pays media outlets for curated content rather than forced through legislation.

The dollar is posting its third consecutive gain against the Japanese yen and has reached JPY105.40 in European turnover. The recent high has been a little above JPY105.75. Rising US yields and equities often coincide with a heavier yen. The 200-day moving average is near JPY105.50, and the dollar has not closed above it since last June. The Australian dollar is rising for the sixth session of the past seven to reach its best level (~$0.7790) in a month.

The Aussie’s advance appears to stand on two legs: the recovery in East Asian economies and what many call a super-cycle in commodities. Last month’s high was set near $0.7820. The dollar has fallen to new lows against the offshore yuan today (~CNH6.4010). It is also the sixth decline in the past seven sessions, and it is the lowest since June 2018. When the mainland markets closed for the extended holiday (February 10), the dollar was just below CNH6.43.

Europe

Draghi has become Italy’s 30th prime minister since the birth of the republic in 1946. It is the fourth technocrat government in three decades. It is not so much a question of which Draghi is the prime minister, the Prussian Roman as he was dubbed during his days as the head of Italy’s central bank, or the “save the monetary union at any cost” as ECB President. Why can’t there be a third Draghi? A different combination of skills and tolerances are needed. If the cabinet is any indication, there is indeed a third Draghi.

He brought over a former colleague from the BoI, Franco, to head up the economic ministry while retaining Di Maio as foreign minister. Net-net, the balance was 15 representative from political parties and 10 without. That the Five Star has four is not so surprising, but Berlusconi’s Forza Italia got three portfolios to enter government for the first time since 2012. The PD and the League got three apiece while Renzi got two, losing one from the Conte government, which it took down. Both chambers of parliament are expected to hold confidence votes this week, which now is a formality.

The eurozone reported industrial output tumbled 1.6% in December. It is twice as much as economists had projected and follows a 2.6% expansion in November. Weakness was in capital goods (-3.1% month-over-month) and non-durable consumer goods (-0.6%). The output of consumer durable goods rose by 0.8%, and intermediate good production rose 1%. Energy output increased by 1.4%. Separately, Eurostat reported that the December trade surplus rose to 27.5 bln euros from 25.8 bln in November.

Revisions to Q4 GDP (-0.7%) will be reported tomorrow. The data highlight of the week is the flash PMI. A small improvement in services is unlikely to lift the composite reading above the 50 boom/bust level, which it has not seen since last October.

The escalation of the US confrontation with China is not the only continuity in US foreign policy. It will continue to confront Europe over the Nord Stream II pipeline. Obama, Trump, and now Biden will seek to deter it. At least two senators had formally urged the State Department, which before the weekend, affirmed that it was a “bad deal for Europe” to implement the sanctions that were approved in the last days’ of the Trump administration. A State Department report to Congres is due tomorrow, but it is not clear that it is ready.

The short-squeeze into the European close ahead of the weekend saw the euro recover from about $1.2080 to $1.2135. The euro was bid in late Asia today to $1.2145, just in front of last week’s high and the key $1.2150 level. Provided the $1.2150 cap holds can grind a little lower in the remaining hours of today’s session, without the US market. Sterling is trading like a risk-on currency. It has risen in seven of the past eight sessions, including today’s advance above $1.39. There is little chart-based resistance ahead of $1.40. The session high is unlikely in place today. Initial support is now seen near $1.3880.

America

US markets are closed today for President’s Day, ironically two-days after the second impeachment of former President Trump failed to secure the necessary votes to convict. With the impeach trial over, the focus shifts back to the confirmation process and the fiscal stimulus. The Biden administration is still talking with 10 GOP Senators to see if there is sufficient common ground to have a bipartisan package.

However, the Democrats have made clear that they are prepared to use the reconciliation process, which has been used by the last few presidents, to pass a large stimulus bill. The risks, such as inflation, arguably can be managed. However, what may prove more difficult to manage is the appetite for a large infrastructure initiative, which is expected to follow the stimulus package. Separately, the winter storm has knocked out power for the equivalent of two million homes in Texas and taken off capacity of around one million barrels.

After today’s holiday, the US economic diary is chock full this week. The highlights include January retail sales and industrial production figures. An early look into this month’s activity comes in the way of the Empire State Manufacturing Survey, the Philadelphia Fed survey, and the preliminary PMI. The FOMC minutes from last month’s meeting are due in the middle of the week, and no fewer than nine Fed officials speak this week.

Arguably, with the rise in nominal rates being driven by an increase in inflation expectations, which the Federal Reserve encouraged by adopting the average inflation target, it cannot be surprised or disappointed with investors’ reaction function.

Canada’s data highlights this week include January CPI on Wednesday and December retail sales on Friday. While the month-over-month increase in CPI (~0.5%) may be offputting, the year-over-year rate may tick up to 0.9% from 0.7%, and the underlying measures are likely to be broadly stable. Retail sales are expected to have fallen by around 2.5% after rising 1.3% in November. Mexico has a light economic calendar this week.

However, the market is still digesting the implication of last week’s 25 bp rate cut. The Deputy Governor of the central bank, Esquivel, suggested that there may be scope for two more rate cuts this year at the end of last week. Most other emerging market central banks are thought to be on hold this year, though a few, including Brazil, are likely to hike.

Rising commodities and equities help underpin the Canadian dollar. The greenback is hovering around last week’s low (~CAD1.2660). There is little support ahead of the low set last month, near CAD1.2600, the lowest level for the US dollar since April 2018. A break would target CAD1.2500. The CAD1.2680 area provides the nearby cap.

The US dollar has slipped to new three-week lows against the Mexican peso below MXN19.90. There is little momentum of which to speak. Immediate resistance is seen in the MXN19.95-MXN20.00 band, while the next target is near MXN19.80.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Speculators Bet on a Continued Commodity Rally in 2021

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, December 8. A week where vaccine and stimulus optimism continue to propel stock markets higher and the dollar lower while bonds held steady. Commodities traded mixed with continued profit taking across agriculture commodities and a big setback for natural gas more than offsetting gains in oil, fuel products and metals, both precious and industrials.

Commodities

The Bloomberg Commodity Index traded lower by 1.2%, hurt by continued profit taking in agriculture commodities led by soybeans, wheat, cocoa and cattle together with a 16.7% drop in the price of natural gas. Overall these developments helped drive a 3% reduction in the total net long held by speculators across 24 major commodities to 2.3 million lots, but not far from the February 2017 record of 2.4 million lots. A clear sign that speculators expect more to come from the commodities in 2021 as the reflation trade gathers momentum and the dollar potentially continues to weaken.

It is also worth noting that speculative positions, compared with recent peaks in 2017 and 2018, are much more spread out across all sectors, with net long positions held in all but one (CBOT Wheat) commodity. In February 2017 when the net-long hit the mentioned record, the energy sector accounted for 56% of the total length while today that share is down to 42%.

graph 1

Energy

The combined net long in Brent (+27k lots) and WTI (-1.6k lots) reached 602k lots, the highest since January. This after Brent began toying with $50/b as the market, despite current Covid-19 lockdowns and loss of mobility, continued to price in a vaccine-led recovery next year. The natural gas long was cut by 26% by in response to a dramatic 16.7% sell-off on demand concerns driven by unseasonal warm weather across the U.S.

Metals

Gold was bought for a second week in response to the rally that followed the failed break below $1800/oz. The bulk of the 19k lots of buying was driven by fresh longs, something that also helps to explain the increased volatility seen last week when the move above and subsequent failure to hold $1850/oz triggered a 45 dollar correction last Wednesday. Net platinum buying extended into a fifth week and during this time, the white metal has outperformed its yellow big brother by 17%.

Speculators in silver meanwhile maintained a net long close to 43k lots for a fourth consecutive week. Thereby extending the lack of price response in a week where the metal rallied by close to 3%. During a week of sideways trading before popping to a fresh seven-year high, the net long in HG copper rose by 5% to 90.4k lots, not far from the 91.6k lots record high recorded two months ago.

Agriculture

For a second week, a broad but relatively small amount of selling was seen across the sector with the soybeans complex and sugar accounting for the bulk of the 58k lots reduction to 1 million lots. Only short position was held in CBOT wheat before a post-WASDE and Russia export tax and quota threats gave the crop a strong end of week boost.

graph 2

Forex

Dollar bears continued to be awarded in the week to December 8 as the Greenback spiraled lower to reach the lowest against both the euro and the Bloomberg Dollar Index since April 2018. The tumble being part of a broader vaccine optimism led move across financial markets pricing in a recovery in global growth for 2021 and the potential for better investment opportunities outside the U.S.

These developments helped drive a 14% increase in the combined dollar short against ten IMM currency futures and the Dollar Index to $30.7 billion, a ten-week high. The bulk of the $3.7 billion of net dollar selling occurred against the euro which saw a 12% rise in the euro net-long to 156,429 lots (€19.6 billion). The other and more surprising contribution came from Sterling which despite trading lower on the week saw 13,609 lots of net buying which swung the net back to a long for the first time in three months.

The Swiss franc together with the Mexican Peso and Russian Ruble saw net selling while the net long in Japanese yen reached a fresh four year high at 48,166 lots.

graph 3

Financials

graph 2

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

COT

This article is provided by COT, part of Saxo Bank Group through RSS feeds on FX Empire