Life’s a beach for currency traders. As many market participants head elsewhere for the weekend, desks are underpopulated and order flow is stretched thinner than Donald Trump’s hairpiece. With activity levels dropping, most major currencies have entered a consolidative phase, settling into the technical ranges established over the past few weeks.
Movement in the oil markets continues to provide those of us still stuck at our desks with some excitement – with many speculators seemingly convinced that members of the Outrageously Petulant Energy Cartel (OPEC) will agree to a production cut at the meeting scheduled for late September. Although momentum is fading this morning, front-month prices stepped over the $48 mark in the last few days, continuing to rise after last week’s comments from the Saudi energy minister.
Energy-exporter currencies like the Canadian dollar and Norwegian krone are trading at high altitude, supported by the idea that a meaningful cut could alter the deteriorating supply and demand fundamentals that were pushing crude toward the $40 threshold only a few short weeks ago.
It seems likely that market participants are setting themselves up for a disappointment. The House of Saud is already pumping record volumes out of the desert kingdom’s sands, while countries like Iran, Iraq, Libya and Nigeria are all committed to increasing production as they fight for market share and seek to replenish depleted coffers.
An output cap might have some symbolic impact in the near term, but would do little to offset increases in the notoriously cheating-prone smaller member countries – or reduce the vast refined-product inventories that are building around the world. Most observers expect demand growth to flatline in the major gasoline markets during the second half, while purchases from China are likely to fall as the economy decelerates and strategic reserves fill up.
The father of value investing, Benjamin Graham once put it, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine” – we’d expect the voting effect to fade over the next few weeks.
Many traders are also squaring positions going into next week’s Economic Symposium in Jackson Hole, Wyoming. This conference is often called ‘Davos for central bankers’ (like Davos, but much more boring), with virtually all of the world’s most powerful monetary policymakers in attendance, including most regional Federal Reserve presidents and Federal Open Market Committee voting members, along with the heads of foreign institutions like the European Central Bank and Bank of Japan.
While the gathering has traditionally been a low-key affair with most of the event held off the record, it has occasionally provided a platform for major shifts – both Alan Greenspan and Ben Bernanke signalled profound policy changes while wearing dad jeans in the middle of the Rockies.
Janet Yellen is scheduled to speak on Friday. While it’s possible that markets will snooze through her speech, it’s also possible that she could cut through the disarray evidenced in this week’s meeting minutes, firmly telegraphing an intention to lift benchmark rates by the end of the year. Although we’re now in the minority, we really wouldn’t rule out a return of the Taper Tantrum at some point soon.
Have a great weekend!
Head, Enterprise Risk
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