Traders experienced a week full of confusion, excitement and nervousness with ECB, OPEC, and non-farm payrolls dominating the headlines.
On Thursday, the EUR enjoyed the best one-day rally since March 2009 gaining 3 big figures after the ECB disappointed markets. As mentioned in earlier reports the central bank needed either to meet or exceed expectations to keep the single currency under pressure. The ECB cut deposit rate by 0.10% to -0.30% “traders were looking for steeper one”, extended QE program until March 2017, but the widely anticipated addition to the €60 billion asset purchase program did not happen. In an attempt to calm down disappointed traders who dumped equities and bought the EUR aggressively after the decision, ECB’s vice president Constancio was the first to say markets got it wrong. Mario Draghi also responded to market criticism and reassured that the central bank had the power to act, the determination to act and the commitment to act and most importantly he stated that no specific limit for the size of the ECB’s balance sheet. However, FX traders responded by “It’s too late” and kept holding on most of the EUR gains.
The monetary policy divergence story is already priced in the markets since couple of weeks and latest U.S. non-farm payrolls report, although exceeded expectations, it failed to stimulate the bruised USD. A Fed rate hike on 16 December is almost a done deal, unless a crash similar to 1987 Black Monday occurs, meanwhile traders should turn their attention to the statement and Chair Yellen speech more than the outcome itself. The Fed will try to downplay a hike by providing dovish forward guidance on future plans; this means any dollar rally will be limited until end of year and the EURUSD parity not likely to be met in the foreseeable future.
After extending the meeting for more than 1.5 hours on Friday, OPEC members in Vienna decided to keep output unchanged at 30 million barrels a day. Earlier on the day, Reuters cited delegates saying the ceiling had been increased to 31.5 million barrels a day to bring it closer with the groups actual output causing WTI to drop below $40 a barrel, but there was no mention of the figure in the official statement. OPEC members have already seen revenues fallen by more than half and impact on economic growth is worrisome in 2016, but with no collaboration from Russia and other producers OPEC will not change the strategy, fighting for market share and selling at discounted prices when required. From a fundamental perspective, the only supportive indicator is the continued drop in U.S. rig counts, with data on Friday showing U.S. energy firms cut oilrigs by 10 in the week ended Dec 4, bringing the total rig count down to 545 after peaking at 1,609 in October 2014. However, trading activity shows money managers continued increasing bearish positions, reaching a new record low last week, and any short covering positions activity will provide a short-term price spike, similar to the one seen in end of August.
The gold rallied 2% on Friday after the US NFP report release led by short covering positions after touching a new 5 years low last week. The recovery in gold prices still looks temporary and the non-yielding asset not likely to find support with current market conditions of no inflation. Assets from world’s biggest gold fund continued to be pulled out by investors and currently assets are at their lowest levels since September 2008. The only indication that could reverse the Gold direction to the upside is to see inflows back to the Gold funds, as physical demand had not been enough to support prices.