Oil markets have jumped to 17-month highs as both OPEC and Non-OPEC oil producers agreed to even further oil production cuts over the weekend, the first such agreement in 15 years. With the production cuts coming fast and furious these latest announcements really are a game changer for the oil market and the currencies of oil-producing countries alike. The credit market reaction has been substantive as well, with a broad selloff in government bonds pushing the US and German yields to multiyear highs as the Trump Trade in equities continues to push forward, fueled by higher inflation expectations along with good old fashioned exuberance.
In Asian trading the Korean won, was an absolute loser, dropping in value as the political uncertainty resulting from the impeachment process now underway roiled markets. The yen also saw losses despite broad weakness in the mighty greenback. Looking southward, commodity market and improved sentiment saw both the NZ and Aussie dollars move higher as New Zealand appointed a new PM to replace John Key who retired abruptly.
Resource stocks in Europe pushed equity indexes further into the green while improved sentiment and higher oil prices saw both the common currency and the sterling gain ground. While not out of the woods yet, the EU economy has seen consistently favourable growth and employment gains, lessening the deflationary fears that had gripped both policy makers and the market. With the ECB under pressure from German law makers and Mario Draghi shifting the asset purchase program there is a small but growing chance that euro bears get caught off guard by a reversal in price action.
Prior to the North American open, equity futures signal a positive open. The loonie continues its flight upwards with the fundamental changes in the oil market giving hope to the bulls. Likewise, the US dollar in general, is lower against its peers as traders take profit and improved sentiment favours non-safe haven currencies. With a rate hike at Wednesday’s FOMC meeting a foregone conclusion the market will be looking for changes in commentary and the Fed’s dot plot to estimate the trajectory of rates going forward. With the growing potential for a return to inflation in the US, the same interest rate or policy divergence narrative that fueled the massive spike in the USD in Q1 2016 may be set for resurrection.
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