Lull benefits USD longs

At the start of the trading week, markets are lacking new drivers that could provide meaningful direction. Last week, US labor market data failed to provide any clarity. US NPF recovered to 196k from ultra weak 20k prior read while wage growth decelerated to 3.2% from 3.4%. Overall, the report provides no guidance into the pace of the US economic slowdown or potential direction of the Fed. Payrolls suggest that peak is behind us, and wages marginally weaker, it’s likely the Fed will hold current dovish bias. We don’t see this week’s CPI read changing this outlook. The Fed will want to see clear evidence of inflation acceleration before shifting direction again. The lack of a clear signal also means that solid manufacturing data and domestic auto sales combined with strong employment growth will produce moderate US growth. Baring a “shock” (political chaos, trade war etc.) we caution against deducing yield curve inversion as recessionary. It more likely given the data flow that growth will stabilize in 1Q and improve in 2Q. USD longs, and Euro shorts are increasing according to CFTC data. This trend indicates the markets are settling in for a period of wide US yields differential against G10, low volatility, and steady stock prices. We don’t expect USD strength to dissipate anytime soon give the uncertainty in Europe and UK.

Oil prices to maintain the pace

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A rebound in US employment figures, ongoing sanctions in Iran, Venezuela and now war escalation in Libya without mentioning OPEC’s production cut and improving Sino-American trade discussions remain the major factors for current lift in oil prices. Despite an acceleration in US oil production, it seems that oil bulls are taking the hand.

Indeed, EIA Crude oil inventories for the week ended 29 March rose by 7.3 million barrels while Baker Hughes weekly oil and gas drilling rigs rig count figures for the US suggest a rise of 15 (+22 from last year), suggesting that production in the US is recovering following US shale production disruption in February. Yet, it appears that OPEC’s Group of 14 still has the last word on oil prices, whose recovery phase started in December 2018 following OPEC meeting, sustains. OPEC’s 4th output cut (-295’000 bpd in March; revised from -560’000 bpd to -380’000 in February) stays consistent and it is expected to maintain current pledge until end-June 2019 assessment. The boost of oil prices is therefore expected to keep up, as major resistance from October 2018 remains while a potential boost is conceivable in the event of a positive trade agreement between the US and China. Still risk of a potential NOPEC bill needs to be monitored carefully. WTI, Brent Crude and Shanghai Crude are trading 39.80%, 35.40% and 24.30% year-to-date.

Currently trading at 63.36, WTI is heading along 63.70 short-term. Major resistance at 76.41 (03/10/2018 high) remains.

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