As we enter trading on Wednesday, global stocks are still recording gains on the upside while continuing to ignore the latest economic downgrade from the IMF. The gains in stocks are mainly due to a combination of the China GDP coming in above market expectations and of course, the rising anticipation that the ECB will finally press the QE button tomorrow.
In regards to the Eurodollar, at one point the pair slipped down to 1.1539 with the Euro bulls reluctant to even consider purchasing the currency, despite the German ZEW survey unexpectedly jumping to an 11-month high. I think that says a great deal regarding the consensus that the overwhelming majority expect QE to be introduced this week. Nonetheless if the ECB disappoints or doesn’t produce the QE the markets are clearly desiring, at least the European markets could be at risk of a heavy rebound.
The optimism that the oil markets could continue to bounce higher following comments late last week that the weaker price could stimulate extra demand and encourage less production have been completely brushed aside this week. The prices of both Brent and Crude declined by nearly $2 yesterday, with Brent falling to $47.76 and Crude pulling back to $46.37. The reason for the resumed selling is quite simple, the economic conditions for the commodity have not changed and the comments last week were just hypotheticals. There continues to be an overpowering supply and demand equation that is highly influential in the price direction of oil, which also continues to be heavily-weighted in the bears’ favour.
If anything, the supply and demand equation is resurfacing to awaken the oil bears, with the equation becoming even more one-sided following rumours yesterday that oil production levels in Iran had reached record levels, alongside the second global economic downgrade within the past week suggesting there will likely be less demand for the commodity. With this in mind, I continue to doubt that a floor in either of the oil markets has been found yet. However, I accept that if the ECB introduce QE tomorrow it will likely encourage optimism that it will drive economic growth in the longer-term, meaning ECB QE introduction would quite likely be price-positive for oil.
Although the extreme volatility following the completely unexpected twist in commitment from the Swiss National Bank (SNB) has slowed down, increased demand for safe-haven assets such as Gold is still trending. The price of Gold has surged following the unexpected central bank swerve, which has inspired traders to approach safe-havens, while the reduced quantity of high-risk US economic data this week is possibly providing Gold bulls with some momentum as well. The price of the metal has reached $1303 at the time of writing, representing another five-month high.
The major mover in the currency markets was the USDCAD, with the pair rocketing by nearly 200 pips yesterday to reach 1.2113. The main catalyst behind the bullish momentum yesterday was Canada Manufacturing Sales falling for the second consecutive month, but to be honest, this pair has been in complete overdrive mode since the comments made by the Royal Bank of Canada (RBC) late last year confirming that the substantial drop in oil value would be negative for the Canadian economy.
There is a Canadian interest rate decision announced today and although any optimism that an interest rate hike would be forthcoming from last spring has been wiped away from a laissez-faire approach from the RBC, the major downside risk for the CAD today would be if the RBC became the next central bank to join the unexpected monetary easing party.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
Follow Jameel on Twitter @Jameel_FXTM
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