Forex Fundamental News Facts for 03rd June, 2024

Forex Fundamental News Facts for 03rd June, 2024

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[Quick Facts]
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1. OPEC+ extends collective oil production cuts into 2025.
2. Biden’s Gaza peace plan.
3. U.S. April PCE has a limited boost to rate cut expectations.
4. Eurozone inflation rises as ECB considers rate-cut path.
5. China is Defending Against the Dollar’s Dominance.

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[News Details]
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OPEC+ extends collective oil production cuts into 2025:

The OPEC+ alliance has agreed to prolong substantial oil production reductions until 2025, as announced in a virtual meeting on June 2. Additional voluntary reductions have been extended until September of this year. These measures aim to elevate oil prices and prevent a global oversupply due to factors such as increased oil production from non-OPEC+ producers, particularly U.S. shale oil companies, and reduced demand in the face of high interest rates and inflation.

The 188th meeting of OPEC oil producers and their allies, including Russia, was postponed and shifted to a virtual platform due to the death of Iranian president Ebrahim Raisi and the ill health of the Saudi King. This move suggests an agreement to extend current production cuts into the second half of the year is likely.

Iraq, the second largest OPEC producer, has been producing over its quota limits, promising to compensate in the latter half of the year. However, its history of low compliance raises doubts about its commitment. Other OPEC members, such as Kazakhstan and Gabon, have also been overproducing, with Gabon showing no plans to compensate.

Angola’s departure from the group after 16 years, joining Ecuador and Qatar, raises questions about the unity of the group. Iran and the UAE have announced plans to increase output, while Nigeria has expressed dissatisfaction over quota restrictions.

The current plan involves a total supply reduction of 5.86 million bpd (5.6% of global demand), which could boost oil prices, benefiting key players like Saudi Arabia and Russia. However, other important producers like Iran and Iraq might not be in favor of continued cuts, especially with the expected record high US supply in 2025.

On the other hand, softer production cuts could lower oil prices, benefiting only a few exporters, including Libya and the UAE. OPEC estimates a demand slowdown to 1.8 million bpd in 2025, suggesting that production might be more balanced next year.

In the meantime, OPEC’s supply cut policy, along with geopolitical risks in Ukraine and Israel, continues to support crude oil prices. The upcoming summer travel season and a positive outlook for China’s recovery could boost fuel demand, while more clarity on the Fed’s rate cuts could stimulate oil investments.

Despite the Organization of Petroleum Exporting Countries (OPEC) and its allies extending their production cuts until 2025, crude oil futures have not seen a rally, with prices falling for four consecutive sessions. However, West Texas Intermediate (WTI) has returned to a zone that has been favorable for investors, suggesting potential opportunities.

OPEC and its allies have agreed to extend their daily production cuts of 3.66 million barrels until the end of 2025. They will also start to phase out voluntary cuts of 2.2 million barrels per day over the next 16 months, starting in September. This decision, which goes beyond market expectations, could be seen as a positive surprise.

OPEC also predicts that the demand for its crude product will average 43.65 million barrels per day in the second half of this year. If the current production rate is maintained, this could lead to a decrease in global inventories of 2.63 million barrels per day. The next OPEC+ meeting is not expected until December 1.

Despite the extended production cuts, WTI front-month contracts have eased lower, possibly due to short-term economic concerns about demand. However, buying dips in WTI between $76 and $76.80 has been a successful strategy for investors this year, often resulting in significant gains. The 200-week moving average is also close, discouraging further selling at these levels. Despite 15 separate tests, WTI has never closed below this level since early 2023.

Given the risk-reward balance, the tendency is to continue buying dips, aiming for a bounce towards the top of the sideways range around $80. A stop below $76 would provide protection against a reversal. Some resistance might be encountered around $78.60. 

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Biden’s Gaza peace plan:

U.S. President Joe Biden has presented a new proposal for a hostage agreement to Israel and has encouraged Hamas to accept it. The proposal, delivered to Hamas via Qatar, outlines a three-phase ceasefire plan. The first phase, lasting six weeks, includes a full ceasefire, the withdrawal of Israeli forces from all populated areas in Gaza, and the release of certain hostages in exchange for the release of hundreds of Palestinian prisoners.

The death of an Egyptian soldier near the Rafah crossing has escalated tensions between Egypt and Israel, already strained by the ongoing Gaza conflict. Despite a history of warfare, Egypt was the first Arab nation to establish diplomatic relations with Israel in 1979, leading to a “cold peace” characterized by limited economic and cultural ties. However, energy and security cooperation have expanded, particularly under President Abdel Fattah al-Sisi.

The recent Israeli military offensive in Gaza has alarmed Egypt, primarily due to fears of mass Palestinian displacement into Egypt’s Sinai Peninsula. The escalation of Israeli operations around Rafah in early May, resulting in control over the Gazan side of the Rafah crossing, has disrupted humanitarian aid deliveries. Israel’s claims that Hamas has used tunnels under the border for arms smuggling have further angered Egypt, which insists it has already destroyed such tunnel networks.

The immediate concern is the flow of humanitarian aid into Gaza, where extreme hunger and a critical lack of healthcare are prevalent. While some aid has been rerouted, most international aid arrives in Sinai and is directed through Rafah. Recently, Sisi and U.S. President Joe Biden agreed to restart aid through Israel’s Kerem Shalom crossing.

Egypt has been central to negotiations between Israel and Hamas for a phased truce and prisoner exchanges. However, these talks have stalled due to Israel’s actions in Rafah. Despite threats to withdraw from its mediation role, Egypt remains committed to negotiations.

The relationship between Egypt and Israel is crucial for regional stability. Both nations have an interest in maintaining open channels to manage the fallout from the Gaza war and domestic and international pressures. They will also be key to post-war plans for Gaza, including managing security along the Egypt-Gaza border.

Lastly, U.S. President Joe Biden’s recent proposal for a three-phase ceasefire plan between Israel and Hamas has been tentatively agreed upon by both parties. This ceasefire is expected to reduce the geopolitical risk premium from crude oil prices, which have been driven up by fears of escalating Middle East conflict.

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U.S. April PCE has a limited boost to rate cut expectations:

The U.S. PCE increased by 2.7% year-on-year in April, consistent with expectations and unchanged from March. It rose by 0.3% month-on-month, also meeting expectations and unchanged from the previous month. Core PCE increased by 2.8% year-on-year, in line with market expectations, and its month-on-month growth rate was 0.2%, slightly below expectations and the previous month’s reading.

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Eurozone inflation rises as ECB considers rate-cut path:

In May, the Eurozone HICP increased by 2.6% year-on-year and the core HICP increased by 2.9% year-on-year, both higher than their previous readings and expectations. While this will not impact the ECB’s June rate cut, it may pose challenges for the European Central Bank’s (ECB) policy path following the June cut. This is due to the rising inflation and the gradual recovery of the Eurozone economy, which will limit the ECB’s monetary policy after the June meeting.

The European Central Bank (ECB) is expected to cut its three main lending rates by 25 basis points in its June policy decision, which would lower the deposit rate to 3.75%. Despite speculation about rate cuts, the euro has remained resilient, likely due to an improving economic picture across the euro area. The main question for ECB policymakers is not whether to cut rates, but by how much and how quickly to ease policy thereafter.

The Bank of Canada (BoC) is also in a position to cut rates, with inflation closer to its target midpoint of 2% and a cooling labour market. However, a rate cut in June is only 60% priced in by the markets, with a July move seen as more likely. If the BoC does cut rates, it could signal the start of an aggressive rate-cutting cycle.

The Federal Reserve (Fed) has faced setbacks this year, with inflation hovering near 3.0% rather than the 2% target. However, recent signs of a cooling jobs market and more cautious consumers could make it easier for the Fed to cut rates at least once in 2024.

The Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries are expected to extend voluntary cuts of 2.2 million barrels per day into the second half of 2024, and pledges to restrict output by 3.66 million barrels per day could be extended into 2025.

Finally, the Australian dollar will be watching for the latest domestic GDP readings on Wednesday, and Chinese data will also be important for the aussie next week. Japanese wage figures out on Wednesday might offer some support to the yen if they show an acceleration in pay growth in April. 

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China is Defending Against the Dollar’s Dominance:

In an effort to defuse tensions and foster cooperation, US Deputy Secretary of State, Kurt Campbell, and China’s Vice Foreign Minister, Ma Zhaoxu, held diplomatic talks in Washington. The discussions, aimed at maintaining open communication to prevent misunderstandings and unintended conflicts, spanned two hours and were followed by a working lunch at the State Department.

The dialogue continued in the afternoon with US Deputy National Security Adviser Jon Finer. White House National Security Adviser Jake Sullivan also joined the meeting to exchange views on key issues. The talks focused on ongoing efforts to maintain military-to-military communication and advance cooperation in areas of mutual interest, such as counternarcotics.

However, contentious issues were also addressed. These included the importance of peace and stability across the Taiwan Strait, US support for international law and freedom of navigation in the South China Sea, Russia’s war against Ukraine, challenges in the Middle East, and efforts to denuclearize the Korean Peninsula.

The Chinese official’s visit follows US Secretary of State Antony Blinken’s trip to Shanghai and Beijing in April. The US is engaging in face-to-face diplomacy with China to clearly communicate Washington’s positions and intentions, aiming to make progress on bilateral, regional, and global issues. The US will continue its engagement with China at senior levels while raising concerns over contentious issues, including Beijing’s support for Russia’s war efforts in Ukraine.

The US, the G7, the European Union, and NATO countries have expressed serious concern regarding China’s support for Russia’s defense industry, warning that Washington could impose sanctions over the matter. China defended its approach to Russia, emphasizing that it is engaged only in normal economic exchanges with a major trading partner.

Since the 1997 Asian financial crisis, financial security has become a crucial aspect of China’s national security dialogue. The escalating geopolitical tensions with the US and the West’s financial sanctions on Russia have prompted Chinese policymakers to strengthen the economy by reducing the dollar’s dominance and creating an alternative system. China has adopted three main strategies for this purpose.

Firstly, China has advocated for regional and multilateral currency and financial cooperation through regional or non-western alliances. Post the Asian financial crisis, it backed the launch of the Chiang Mai Initiative in 2000 and the Bank for International Settlements’ Renminbi Regional Liquidity Arrangement in 2022, in response to the economic shocks of the Covid-19 pandemic. China has also collaborated with the Shanghai Cooperation Organisation and other Brics countries to encourage the use of local currencies in trade, investment, and development finance.

Secondly, China has sought to expand the use of the renminbi in international trade and investment while advancing renminbi-based international financial infrastructures. Post the 2008 financial crisis, the Chinese government has invested in developing a renminbi-based financial infrastructure. In 2015, it introduced the Shanghai-based Cross-border Interbank Payment System (CIPS) to promote renminbi internationalisation. CIPS enables banks to clear cross-border renminbi transactions onshore, offering an alternative to the Swift messaging system and the New York-based Clearing House Interbank Payments System.

Thirdly, China aims to enhance the renminbi’s role in global commodities pricing, particularly in the shift to clean energy. It has established several commodities trading platforms and launched renminbi-denominated oil futures in 2018 and copper futures in 2020. It also introduced the Ganzhou Rare Metal Exchange in 2019 for spot trading of essential minerals for the clean energy transition.

In the short to medium term, China can leverage the energy transition to develop a ‘gas-yuan’, mirroring the petrodollar. As the global economy shifts from being hydrocarbon-dependent to mineral-dependent, China could also exploit its dominance in critical mineral supply chains and its partnerships with mineral-rich countries.

China’s strategies to develop an alternative financial system are defensive for now, aiming to minimise the adverse effects of the West’s comprehensive sanctions against China in extreme geopolitical scenarios. While expanding the use of the renminbi in trade is less daunting than increasing its status as an international reserve currency, capital controls, combined with the lack of risk-free renminbi-denominated assets and the relatively closed nature of the Chinese financial market, hinder the renminbi’s rise as an international reserve currency that can credibly challenge the dollar.

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🔥News releases on THIS WEEK :

03/06 Mon All Day NZD Bank Holiday

03/06 Mon 7:45pm USD Final Manufacturing PMI

03/06 Mon 8:00pm USD ISM Manufacturing PMI

04/06 Tue 12:30pm CHF CPI m/m

04/06 Tue 8:00pm USD JOLTS Job Openings

04/06 Tue Tentative NZD GDT Price Index

05/06 Wed 7:30am AUD GDP q/q

05/06 Wed 7:45am CNY Caixin Services PMI

05/06 Wed 2:30pm GBP Final Services PMI

05/06 Wed 6:15pm USD ADP Non-Farm Employment Change

05/06 Wed 7:45pm CAD BOC Rate Statement

05/06 Wed 7:45pm USD Final Services PMI

05/06 Wed 8:00pm USD ISM Services PMI

05/06 Wed 8:30pm CAD BOC Press Conference

06/06 Thu 2:30pm GBP Construction PMI

06/06 Thu 6:15pm EUR Main Refinancing Rate & Monetary Policy Statement

06/06 Thu 6:30pm CAD Trade Balance

06/06 Thu 6:30pm USD Unemployment Claims & Trade Balance

06/06 Thu 6:45pm EUR ECB Press Conference

07/06 Fri Day 2 EUR European Parliamentary Elections

07/06 Fri 6:30pm CAD Employment Change & Unemployment Rate

07/06 Fri 6:30pm USD Average Hourly Earnings m/m & Non-Farm Employment Change & Unemployment Rate

N.B. Time mentioned here is on Gmt +6

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Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc

Prepared to you by “Akif Matin“

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