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Oil prices retreated to 5-week lows with expectations of a less favourable supply/demand balance

Posted: 18th November 2021

Daily market report November 18th 2021

Market highlights.

  • Consolidation was the overall market theme during Wednesday with relatively narrow ranges prevailing.
  • Markets continued to monitor global inflation developments and central bank policies.
  • US bond yields were little changed as markets waited for an announcement on the Fed Chair.
  • Wall Street equities drifted lower with reservations over valuations and lower energy prices.
  • Asian markets posted limited net losses with concerns over growth trends.
  • The dollar held firm, but drifted lower from 16-month highs.
  • EUR/USD found some support below 1.1300 with an element of short covering, but coronavirus reservations persisted.
  • Sterling posted net gains as inflation data reinforced expectations of a December rate hike with EUR/GBP close to 20-month lows.
  • The Canadian dollar was undermined by the retreat in oil prices, while the Australian dollar recovered from intra-day lows.
  • Oil prices retreated to 5-week lows with expectations of a less favourable supply/demand balance.
  • Precious metals maintained an underlying strong tone with inflation trends in focus.
  • Bitcoin found some support below the $60,000 level.

EUR/USD

The headline Euro-zone CPI inflation rate was confirmed at 4.1% for October, although there was a slight downward revision to the core rate to 2.0% from 2.1%.

ECB Council member Schnabel stated that by continuing to buy bonds, the ECB could signal that a rate hike is not imminent.

Underlying Euro sentiment remained weak, although it secure an element of relief ahead of Wednesday’s New York open with a pause in the selling pressure and it edged back above the 1.1300 level against the dollar. There were still expectations that underlying yield spreads and the dovish Euro stance would undermine the single currency over the medium term with markets also looking to assess the extent of net capital outflows from the Euro area.

US housing starts declined marginally to an annual rate of 1.52mn from a revised 1.53mn previously and slightly below consensus forecasts while building permits increased to 1.65mn from 1.59mn which had little overall impact.

The dollar attempted to post renewed gains after the New York open, but EUR/USD found further support just below the 1.1300 level with an element of short covering on the main crosses.

The US currency was unable to make headway on Thursday as commodity currencies attempted to stabilise, although overall sentiment held firm. EUR/USD traded just above the 1.1300 level with the market reluctant to push the currency lower again without at least a limited correction.

USD/JPY

US Treasuries were mixed in early US trading on Wednesday with the 10-year yield settling around 1.63%. Underlying dollar sentiment held firm, although there was tough USD/JPY resistance on approach to 115.0 which helped trigger a limited initial correction, especially with US equities drifting lower during the day.

There was a sharper correction after the European close with USD/JPY sliding to lows just below 114.00 as the yen also gained on the crosses.

Chicago Fed President Evans stated that he is looking for inflationary pressure to recede, but will be monitoring the situation well into the middle of 2022.

Markets remained on alert for an announcement by President Biden on whether Fed Chair Powell will be nominated for a second term or whether Brainard will be chosen instead. Sources indicated that an announcement was likely within the next few days.

Asian equities overall tended to drift lower on Thursday, although ranges were narrow with USD/JPY edging higher to around 114.20 and EUR/JPY around 129.15.

Sterling

Sterling continued to move higher following the latest inflation release with the higher than expected print for the October data triggering fresh unease and  reinforcing expectations that the Bank of England would sanction an interest rate hike at the December policy meeting.

Gains did, however, slow later in the day given expectations that higher rates had already been priced in to money markets.

Bank of England MPC member Mann stated that short-term inflation expectations were lagging the actual CPI rate and she was confident that people believe that the bank will bring inflation back to the 2% target. She added that goods inflation was expected to moderate during 2022 as supply difficulties ease. There were no direct comments on the outlook for near-term interest rate decisions.

Brexit Minister Frost stated that a deal with the EU over the Northern Ireland protocol could be achieved before Christmas which helped underpin sentiment to some extent, although there were still reservations over underlying tensions and yield trends tended to dominate.

The Euro remained vulnerable and EUR/GBP retreated to fresh 20-month lows just below the 0.8400 level. GBP/USD was held below 1.3500 as the US currency maintained a firm overall tone. GBP/USD traded just below 1.3500 on Thursday with EUR/GBP testing support below 0.8400.

Markets will continue to monitor comments from Bank of England officials in the short term while the latest retail sales data will be released on Friday.

Swiss franc

The Swiss franc resisted further losses on Wednesday and was again resilient against major currencies. The Euro was unable to make further headway and EUR/CHF drifted back towards the key 1.0500 level during the day while USD/CHF peaked around 0.9330 before edging lower again.

The Swiss franc continued to gain underlying support from expectations that inflation control would maintain currency strength over the longer term, especially given the current focus on global inflation trends. The franc maintained a strong tone on Thursday with USD/CHF trading below the 0.9300 level.

AUD/USD + USD/CAD

AUD/USD briefly moved back above the 0.7300 level on Wednesday, but was unable to hold the gains and there was a gradual retreat amid reservations over commodity prices and a firm US dollar.

In this environment, AUD/USD dipped to the 0.7270 area.

AUD/USD dipped further to lows near 0.7250 with reservations over commodity price trends, but selling pressure faded and there was a recovery to 0.7285 in Asia amid a lack of fresh incentives.

The Canadian consumer inflation rate increased to 4.7% for October from 4.4% previously and in line with consensus forecasts.

The core rate increased to 3.8% from 3.7% while the Bank of Canada core rates were unchanged.

The Canadian currency failed to draw support from the data and edged lower amid lower oil prices and a strong US dollar.

USD/CAD peaked at 6-week highs around 1.2625 before a limited retreat to 1.2605 on Thursday.

NOK+ SEK

There was choppy Norwegian krone trading on Wednesday with little net direction as a retreat in oil prices dampened potential support and EUR/NOK settled just below 9.90.

The pair traded just above 9.90 on Thursday with USD/NOK around 8.75.

The Swedish krona recovered some ground with support from solid fundamentals, but EUR/SEK held above the 10.00 level.

EUR/SEK traded around 10.03 on Thursday with USD/SEK around 8.86.

Equities

Euro-zone equities were held in tight ranges on Wednesday with expectations of a dovish ECB policy offset by coronavirus reservations and concerns over supply issues while Wall Street failed to provide support.

Major UK stocks were undermined by increased speculation that the Bank of England would be forced into a near-term tightening. Commodity prices were also fragile while underlying cost pressures persisted.

Wall Street stocks edged lower on Thursday with underlying reservations over growth conditions and the impact of sustained upward pressure on costs with valuation concerns also in evidence with the S&P 500 index declining 0.25%.

Futures edged higher on Thursday, although Asian equities tended to drift lower with significant selling in the Chinese tech sector.

Japan’s Nikkei 225 index declined 0.3% as the dollar retreated, while the Australian ASX index posted a 0.1% gain.

China’s Shanghai index declined 0.45% with Hong Kong’s Hang Seng index 1.5% lower in late trading.

Commodities

Oil prices lost ground on Wednesday following reports from OPEC and the EIA that net supply was likely to increase. There were also some reservations surrounding global demand conditions, especially with European coronavirus concerns.

EIA data recorded a 2.1mn barrel draw in inventories in the latest week, close to the API data while there was a decline in gasoline stocks, but Cushing stocks increased slightly.

WTI had already edged lower and the data failed to provide support with selling pressure increasing after a break below the $80.0 p/b level.

Selling pressure continued in Asia with further reports of a co-ordinated release of global reserves.

WTI dipped to 5-week lows with the January contract near $77.00 p/b and Brent just below $80.00 p/b.

Precious metals again secured underlying support from longer-term inflation concerns during Wednesday and there were net gains as headwinds from a strong dollar eased at least temporarily.

Gold posted a net advance to just above $1,865 per ounce with silver just above $25.00 per ounce.

There was little change on Thursday with Gold close to $1,865 per ounce.

Cryptocurrencies

Cryptocurrencies were unable to make headway in early Europe on Wednesday, but there was a sharp move higher later in the session with bitcoin jumping to just above $60,000.

Coins were underpinned to some extent by a slowdown in the dollar advance, but continued to monitor the regulatory environment.

There was choppy trading in Asia on Thursday with bitcoin continuing to test the $60,000 area.

Ether also posted net gains in tentative European conditions. There was a stronger advance in Asia with a peak near $4,350 before a retreat to near $4,250.

Calendar

Major events for the day ahead: (times in GMT)

13.30: US Philly Fed index

13.30: US jobless claims

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