Forex Fundamental News Facts for 14th June, 2024
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[Quick Facts]
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1. G7 agrees to use frozen Russian assets to aid Ukraine.
2. OPEC disagrees with IEA: oil demand will not peak in the long run.
3. Political factors accelerate French bonds’ decline.
4. U.S. producer prices fall unexpectedly in May.
5. Fed Diverges From Global Peers in New Era of Higher for Longer.
6. The euro faces uncertainty on unpredictable French election results.
7. Asian Consumer Demand for Gold Seen Staying Strong This Year.
8. Inflation In China Is Finally Beginning To Stabilize.
9. Yen Drops, Bond Futures Rise as BOJ Defers Detail on Debt Buying.
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[News Details]
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The G7 leaders have decided to extend a $50 billion loan to Ukraine, using the interest from Russia’s frozen central bank assets as collateral. This decision was a key highlight of the G7 summit in Italy. Ukrainian President Volodymyr Zelenskyy, who was present at the summit, signed a long-term security agreement with U.S. President Joe Biden. This follows a 10-year security agreement with Japan, which has committed $4.5 billion to Kyiv this year. The G7’s aid plan for Ukraine involves a multi-year loan, backed by some $300 billion of seized Russian funds, most of which are frozen in Europe.
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The G7 leaders have decided to extend a $50 billion loan to Ukraine, using the interest from Russia’s frozen central bank assets as collateral. This decision was a key highlight of the G7 summit in Italy. Ukrainian President Volodymyr Zelenskyy, who was present at the summit, signed a long-term security agreement with U.S. President Joe Biden. This follows a 10-year security agreement with Japan, which has committed $4.5 billion to Kyiv this year. The G7’s aid plan for Ukraine involves a multi-year loan, backed by some $300 billion of seized Russian funds, most of which are frozen in Europe.
A few years back, BP Plc, a British oil and gas giant, expressed concerns about the instability of the North Sea crude price, Dated Brent, which is their primary pricing benchmark. This was due to a small group of traders occasionally controlling up to 40% of the world’s total crude supply for certain months, enabling them to influence the markets. However, the introduction of the U.S.’s WTI Midland into the benchmark has increased liquidity and reduced the potential for manipulation by significantly expanding the pool of tradeable cargoes.
The U.S. shale revolution over the past 15 years has transformed the U.S. into the leading oil producer and a net exporter of oil. As a result, S&P Global’s Platts added U.S. WTI Midland crude from the Texas shale fields to the global Dated Brent benchmark, which accounts for approximately 80% of the world’s crude.
The inclusion of WTI Midland into Dated Brent has also prevented North Sea producers from placing their own cargoes into so-called chains, which are usually the cheapest grades. This allows a company with forward contracts to sell actual barrels of oil to another firm, linking the paper and physical markets.
U.S. crude is expected to continue dominating global markets for years to come. Data from ship tracker Kpler shows that WTI Midland exports reached a record 2.94 million bpd in December, a 550,000 bpd Y/Y increase. More than half of the December volumes were sent to Europe.
The inclusion of U.S. crude in dated Brent also benefits U.S. producers as they can sell WTI Midland many months forward into the Brent market, securing future revenues and eliminating significant pricing risk. This has helped increase activity in U.S. crude futures markets.
However, the short-term U.S. shale oil outlook appears uncertain. StanChart reported that the horizontal rig count started to decline sharply in early 2023 and currently sits 20% below its post-pandemic peak. The analysts predict that U.S. crude output will be 300 kb/d lower than the pre-pandemic peak by the end of the year.
Despite this, most experts predict that global oil demand will continue to grow in the coming years. The OPEC Secretariat, StanChart, the EIA, and the Paris-based International Energy Agency (IEA) have all forecasted demand growth for 2024 and 2025.
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French bonds have seen a significant drop, pushing yields over safer German bonds to a seven-year high. This is due to fears that Marine Le Pen’s far-right National Rally party may introduce lax fiscal policies if they win the upcoming elections. The yield gap between French and German 10-year government bonds has widened to 69 basis points, the highest since 2017. Market activity suggests further declines in French government bonds.
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In May, the U.S. producer price index (PPI) unexpectedly fell by 0.2%, compared to a 0.5% increase in April. Year-over-year, the PPI rose by 2.2% in May, following a 2.3% increase in April. This decrease, mainly due to lower energy costs, indicates that inflation is slowing down after a spike in the first quarter. This has raised hopes in the financial market that the Federal Reserve may start reducing interest rates in September.
Financial enthusiasts often predict the dollar’s downfall, likening the U.S. to the Roman Empire in its decline. They argue that the dollar’s global dominance is waning as capitalism is slowly dismantled. This argument has been around for over two decades and has gained traction with recent geopolitical events, such as the freezing of Russia’s dollar reserves in 2022.
The possibility of a coordinated global effort to dethrone the dollar exists. If successful, it would strip the U.S. of its privilege to issue debt on its own terms, knowing other nations will readily accept it. This could significantly alter market and trade dynamics. However, concrete evidence of this shift is scarce.
Data from the IMF shows a decrease in the dollar’s share of global central bank reserves from over 65% in 2016 to 58.4% by the end of 2023. Meanwhile, the Chinese renminbi’s share has grown from zero to 2.3%. However, the New York Fed suggests this shift away from the dollar is not global but limited to a few countries, including Switzerland, China, India, Russia, and Turkey.
Central banks worldwide have increased their gold purchases, possibly to evade sanction risks. Despite this increase in 2022 and 2023, gold only accounts for 10% of the global reserve total. The New York Fed warns against generalizing the actions of a few countries as a global trend.
Despite the doom and gloom predictions, the demand for the dollar remains strong. A survey covering 73 central banks with a combined reserve of $5.4tn revealed that a net 18% plan to increase their dollar allocation, attracted by higher interest rates and a strong U.S. economy. The euro is the next preferred currency, indicating a preference for larger, more liquid currencies.
Conversely, the appetite for the renminbi has declined, with 12% of managers planning to reduce their holdings. This is a significant shift from 2021 and 2022 when nearly a third were looking to increase their renminbi holdings. This change is attributed to pessimism about China’s near-term economic outlook, lack of market transparency, and geopolitical concerns.
While it’s possible that the current political climate could threaten the dollar’s long-term standing, it’s premature to declare the end of the dollar’s dominance in the global financial system. It was premature two decades ago, and it remains so today.
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Fed’s Stance on Rate Cuts: The Federal Reserve has signaled a shift in its monetary policy, indicating that it now anticipates only one rate cut this year, as opposed to the three cuts it had projected in March. This suggests that the era of higher interest rates is here to stay. Fed Chairman Jerome Powell stated that the federal funds rate would not be reduced until there is greater confidence that inflation is moving sustainably towards 2%.
Contrasting Moves by Other Central Banks: In contrast to the Fed’s stance, the Bank of Canada and the European Central Bank have initiated an easing cycle, lowering their benchmark rates. This divergence from the Fed’s policy could have significant implications for the global economy, as higher US interest rates could attract foreign capital away from other economies, particularly emerging ones.
Impact on Currency Markets: The divergence in monetary policies among central banks is influencing currency markets. The high yields in the US are attracting investments in American assets, strengthening the dollar against other currencies. The euro, Canadian dollar, and Swedish krona have weakened against the dollar, while the yen weakened after the Bank of Japan decided to maintain its monetary policy.
Inflation Concerns: Despite the anticipation of rate cuts, policymakers warn that inflation remains a threat. Central banks across the globe are being cautious in their approach to rate cuts, with some, like the Reserve Bank of Australia, warning of ongoing price pressures. The Fed, too, is expected to limit its rate cuts due to pockets of inflation remaining above the 2% target.
Market Expectations: Market participants anticipate a rate cut by the Fed in September, following a key inflation indicator posting its smallest annual advance in over three years. However, the extent of divergence in monetary policies may be limited, as there’s no guarantee that other central banks will have the scope to further lower their rates. The Fed’s patient approach to starting its easing cycle is seen as a measure to avoid having to reverse rate cuts should inflation pick up again.
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The outcome of the French elections has become increasingly unpredictable, causing expected volatility in the euro before July 7. The French Republican Party recently removed party leader Eric Ciotti for advocating an alliance with Marine Le Pen’s far-right National Rally party. Marion Marechal, Le Pen’s niece and a former key member of the National Rally, has urged her followers to vote for the National Rally. French Finance Minister Le Maire warned that if the National Rally comes to power and implements its program, France could face a debt crisis, leading to a drop in the euro.
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Despite a brief rebound triggered by the Federal Reserve, European stock markets are expected to close the week negatively due to political uncertainties. In contrast, Wall Street maintained its upward momentum, fueled by a tech rally, while Asian stock markets were impacted by falling metal prices and subdued Chinese economic data.
In Europe, major benchmark indices fell for the week following an unexpected rise in far-right power in the EU Parliamentary Elections. This led to a significant selloff in French markets, with banking stocks leading the broad losses amid investor concerns over potential disruptions to public financial stability. German automaker shares were also affected by concerns over potential Chinese retaliation on tariffs.
On Wall Street, US stock markets reached new highs following the Fed’s rate decision, with the tech rally led by Apple contributing to the bullish momentum. However, the Dow Jones Industrial Average lagged behind, declining compared to a week ago, weighed down by losses in industrial and banking stocks.
In Asia, major stock indices showed mixed performance for the week. The Bank of Japan kept the policy rate unchanged as widely expected and signaled a potential reduction in bond purchases at the next meeting. This dovish stance led to a decline in the Japanese Yen and boosted Japanese stock markets. However, Chinese stock markets experienced declines due to disappointing economic data and escalating trade tensions with both the EU and the US.
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China’s Inflation and Property Market: In May, China’s consumer inflation remained steady, while the drop in producer prices showed signs of slowing down. This points to a sluggish demand in the midst of a prolonged property market downturn in the world’s second-largest economy. Despite various government measures to boost the economy, consumer confidence remains low due to ongoing issues in the property sector, preventing significant price increases.
Consumer and Producer Price Indices: China’s Consumer Price Index (CPI) saw a year-on-year growth of 0.3% in May, mirroring the figure from April, but slightly below economists’ predictions. On a monthly basis, the CPI saw a slight decrease of 0.1%. On the other hand, the Producer Price Index (PPI) contracted by 1.4% year-on-year in May, which was a bit worse than expected, but still an improvement from the steeper decline in April.
Economic Forecasts: Zichun Huang, a China Economist at Capital Economics, anticipates that the rise in factory-gate prices is likely to be temporary due to overcapacity, and expects them to resume their decline, keeping PPI inflation negative for the rest of the year. He also predicts a modest rebound in consumer price inflation in the coming months, thanks to a continued easing of food price deflation and an increase in energy price inflation. However, he expects the CPI inflation to average only 0.5% this year due to persistent overcapacity.
Economic Challenges and Government Measures: Despite the easing of COVID-19 restrictions, China’s economy continues to face challenges, with the lingering effects of the property sector crisis dampening investor and consumer sentiment. To stimulate economic activity, the Chinese government has implemented various measures, including incentives for housing purchases and consumer goods trade-ins, as well as initiatives to boost job creation and domestic demand.
Core Inflation and Economic Recovery: However, data on core inflation, which excludes volatile food and energy prices, revealed a slowdown in May compared to April. This suggests that domestic demand remains fragile, posing challenges for sustained economic recovery. Given these circumstances, many economists expect Beijing to introduce further support measures in the coming months to stabilize economic growth and achieve its target of around 5% GDP growth for the year.
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The Japanese yen experienced a downturn, and sovereign bonds saw a surge following the central bank’s announcement of a reduction in debt purchases, with further details postponed until the next policy meeting. The yen fell by up to 0.6% against the dollar, while benchmark 10-year bonds rose, pushing yields to as low as 0.915%. Market expectations for a rate hike by the central bank next month have been reduced, according to swaps market pricing.
Despite leaving monetary policy unchanged, the Bank of Japan’s announcement may limit increases in debt yields. However, the gap between Japanese and US bond yields remains significant, putting pressure on the nation’s currency. Market reactions suggest that the Bank of Japan needs to reduce its JGB purchases more quickly than indicated, and continuing currency intervention could be seen as a wasteful expenditure.
The authorities have indicated their readiness to intervene in the market to support the yen, having spent a record ¥9.8 trillion ($62.1 billion) earlier this year to bolster the yen after it hit a 34-year low against the dollar. A rapid drop in the yen could raise concerns about intervention, potentially slowing the movement.
The yen is currently the weakest among the Group-of-10 currencies against the dollar this year, falling more than 10%, as the Federal Reserve holds off on cutting its benchmark interest rate amid robust economic growth and persistent inflation. Fed officials have projected just one interest-rate cut this year and more cuts for 2025, as they unanimously voted to maintain the benchmark rate earlier this week.
The Bank of Japan (BOJ) recently announced that its board unanimously agreed to maintain the overnight interest rate target between 0% and 0.1%. This decision comes after the bank’s first rate hike in 17 years and the termination of the seven-year yield curve control framework in March.
Simultaneously, the board voted 8 to 1 to gradually reduce the bank’s substantial financial asset holdings over the next one to two years. Toyoaki Nakamura, a former Hitachi executive, was the lone dissenter. He advocates for reducing Japanese Government Bond (JGB) purchases but believes such a decision should be made after evaluating growth and inflation prospects in the bank’s quarterly Outlook Report.
The board also decided to decrease its JGB purchases to allow long-term interest rates to be more freely determined in financial markets. This move is part of the bank’s strategy to gradually normalize its monetary policy after 11 years of extensive easing. The BOJ plans to gather opinions from market participants and decide on a detailed plan for reducing its purchase amount in the next one to two years.
Market participants anticipate the BOJ to raise the overnight rate again in July or September, and possibly once more by the end of the year, barring any significant economic downturn.
In March, the bank decided to stop targeting the yield on 10-year JGBs, which had been capped at around 0.1%. However, it decided to continue its JGB purchases at roughly the same amount as before, about 6 trillion yen a month. In the event of a rapid rise in long-term rates, the bank stated it would respond flexibly by potentially increasing JGB purchases and conducting fixed-rate purchases of JGBs.
The board also unanimously decided in March to cease new purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITS), and to gradually reduce purchases of commercial paper and corporate bonds over the next year. These large-scale asset purchases were used to bolster market and economic sentiment.
Despite the short-term rate being close to zero, bank officials noted that monetary conditions would remain accommodative for now. However, they acknowledged the negative impact of the weak yen on high import costs, partly due to the expectation that Japan’s interest rates will remain significantly lower than those in the U.S., maintaining the dollar’s relative strength.
The BOJ reiterated its recent assessment that Japan’s economy is likely to continue growing at a pace above its potential growth rate, estimated to be between zero and 0.5%. This growth is expected due to moderate growth in overseas economies and a gradually intensifying virtuous cycle from income to spending, facilitated by accommodative financial conditions.
Looking ahead, the bank repeated its long-standing assessment that there are extremely high uncertainties surrounding Japan’s economy. These uncertainties include developments in overseas economic activities and prices, commodity prices, and domestic firms’ wage- and price-setting behavior. The BOJ emphasized the need to pay close attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices.
In its April Outlook Report, the BOJ largely maintained its latest inflation outlook. It expects the year-on-year increase in the core CPI (excluding fresh food prices) to be in the range of 2.5% to 3.0% for fiscal 2024 and then be at around 2% for fiscal 2025 and fiscal 2026.
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🔥News releases on THIS WEEK :
13/06 Thu 12:00am USD Federal Funds Rate & FOMC Statement
13/06 Thu 1:15am CAD BOC Gov Macklem Speaks
13/06 Thu 7:30am AUD Employment Change
13/06 Thu 6:30pm USD PPI & Core PPI m/m
13/06 Thu 10:00pm USD Treasury Sec Yellen Speaks
14/06 Fri Tentative JPY Monetary Policy Statement & BOJ Press Conference
14/06 Fri 8:00pm USD Prelim UoM Consumer Sentiment
14/06 Fri 11:30pm EUR ECB President Lagarde Speaks
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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