Crude prices fell 5% as traders sold-the-fact on a 9-month supply cut extension. The US dollar was the top performer while the Australian dollar lagged. Japanese CPI is due up next.
Management is the art of communication and that extends to market management as well. A month ago, a nine-month extension of OPEC/non-OPEC supply cuts would have been a welcome surprise in the energy market.
Instead, stories began to circulate about a six-month extension. That was followed by talk of a nine-month extension and it was eventually capped off by speculation about a 12-month extension or deeper cuts. By the time today's nine-month extension was announced it underwhelmed and WTI crude fell to $48.80 from $52.00. Brent had a similar 5% fall.
The challenge now is to separate the disappointment trade from the fundamentals. At current levels, oil is well below the Dec-Feb range and is nearing the March bottom at $47-48. It's still far above May's $44.00 low.
An offshoot of the oil trade is USD/CAD. That pair rose 65 pips on Thursday but that's less than the bulls would have hoped given the 100 pip drop the day before. You have to wonder if CAD has been hit by so much bad news – and with such a massive net short – that there is no fuel left for the bears.
Switching gears, the week winds down for Asia-Pacific traders with a Japanese CPI as the main highlight. The April numbers are due at 2330 GMT and expected to be up 0.4% year-over-year but flat excluding fresh food and energy.
Another event to watch is a speech from the Fed's Bullard at 0200 GMT. He's said previously that he doesn't think another hike is necessary but wouldn't be opposed to one more.
Finally, the RBA's Richards is in a panel presentation at 0430 GMT.
|National Core CPI (y/y)|
|0.4%||0.2%||May 25 23:30|
The FOMC minutes showed that officials aren't dead-set on hiking in June and beyond. That led to a US dollar lagging Wednesday while in contrast CAD led the way after the BOC statement hinted that policymakers are growing more optimistic about growth. Next, it's onto comments from Evans, Sakurai and Debelle. A new GBP trade has been issued in addition to the 5 existing Premium trades.
USD/CAD fell a full cent on Wednesday as commentary from the Fed and BOC diverged. Two weeks ago, a Fed hike was seen as a done deal but soft data has clouded the picture. The minutes said that most policymakers wanted to hike soon but generally agreed that it would be prudent to make sure the recent slowdown in growth is only a blip before hiking again. And that was before soft retail sales and CPI.
Plenty of economic data remains to help shape the Fed's view but the broad half-cent drop in the US dollar after the minutes showed doubts creeping in. The CME Fedwatch implied probability of a hike remains at 82% but that will be sensitive as top-tier economic data begins to roll in.
In contrast, the BOC was pessimistic early in the year but has been bombarded with strong economic data. Poloz largely brushed it off but in the latest BOC statement he changed tack and acknowledged improvements in housing, consumer spending, jobs and business investment.
The statement said the neutral stance was 'still' appropriate but that time qualifier shows it won't take much more to tilt the balance to hawkish.
The Canadian dollar climbed across the board despite a 20-cent dip in oil. The pair will be back in focus on Thursday with the OPEC decision due. It's been widely communicated that a 9-month extension is coming but the risks remain to the upside until the headlines are fully digested.
Before the focus shifts to OPEC, central banks speakers from around the world will take centre stage. It begins at 0125 GMT with the Fed's Evans. He could single-handedly beat back the dovish Fed sentiment. He's followed 5 minutes later by the BOJ's Sakurai. Then, at 0800 GMT, the RBA's Debelle speaks in London. The New Zealand budget at 0200 GMT could also be a market mover.
|FOMC's Brainard Speaks|
|May 25 14:00|
|Gov Council Member Leduc Speaks|
|May 25 16:00|
With Trump overseas the focus on politics is fading at the same time as the June 14 FOMC meeting comes into focus. The New Zealand dollar was the top performer while the euro lagged as it finally gave up some ground. Kuroda and Australian construction work are up next.
The US dollar caught a bid late in New York trade on Tuesday as Treasury yields moved higher. Yesterday's speech from Brainard generally avoided monetary policy except for a nod towards soft core inflation in the Q&A. The thinking was that she would have said something more if she was planning to argue against a June hike. The same could be said about another dove in Kashkari. He said he wants to see more economic data before making up his mind.
The thinking in the market is as follows: If the dovish contingent at the Fed hasn't been swayed yet, there's no hope of swinging the moderates and hawks in time for June 14.
There is still time for a shift before the June 3 blackout period starts. A full slate of top-tier data is due before then and one to watch will be the FOMC minutes on Wednesday. They will likely skew hawkishly because they're from May 3, when officials had more confidence about inflation and growth. But if the Fed wants to sneak in a hint about patience, it's an opportunity.
Before that, the BOJ's Kuroda speaks at 0000 GMT in Tokyo. Expectations are low for any kind of shift from the BOJ at the moment so any hint might enliven JPY trading.
For AUD traders, the Q1 construction work report is due at 0130 GMT. The consensus is for a 0.5% decline to compound a 0.2% drop in Q4 2016. Any miss is likely to move AUD as the RBA keeps a close eye on data.s
|FOMC's Kaplan Speaks|
|May 24 22:00|
|Eurozone ECB President Draghi Speaks|
|May 24 12:45|
|FOMC Meeting Minutes|
|May 24 18:00|