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Market Wrap
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According to a report released by the US Energy Information Administration (EIA), crude oil stockpiles dropped by 1 million barrels in the week ending May 20th, 2022. In total, petroleum stocks went up by 0.7 million barrels. The US Crude production maintained at 11.9 million bpd and in terms of economic activity, traders will not be surprised to see a larger than expected build in distillate stocks. It will be a case of demand worries coming into the next OPEC+ meeting as calls for the US to be in a recession grow, as the Fed try and cool the economy.
The Brent daily chart is now treading water within the range as the retail sentiment grows to an extreme level of bullishness. The general rule I follow is to fade extreme sentiment and to expect the market to break in the opposite direction of travel when leaving a trading channel.
The USA is a net exporter of oil and yet they have sent two senior officials of the Biden administration to Saudi Arabia to try and get a deal with the OPEC leader, Israel, and Egypt with regards to a possible oil production increase. President Biden will have a hard time of things in the mid-term elections if the voters don’t see a reduction in inflation, which is being driven higher by rocketing energy prices.
Going into the FOMC meeting minutes release tonight the euro was the weakest currency closely followed by the Aussie and Yuan. The meeting minutes show that most of the Fed officials backed the 50bps hikes at the next couple of meetings but they all agreed that the rate hike was appropriate in May and that the current US economy is strong. Inflation is obviously their key concern, but they noted the risks from the war in Ukraine and the supply chain shocks coming from China following their lockdowns will continue to add risk.
The FOMC are all in approval for the current plans to reduce the Fed’s balance sheet. Today the New York Fed published the latest Reverse Repo figures which show $1.996 trillion being placed with the Fed in exchange for collateral. There is a small interest payment on the cash that is placed with the Fed, so that is one reason for doing the RRP. The worry for the larger money markets and emerging markets with dollar dominated debt is that there is a lack of high-quality collateral and especially US dollar which are the most liquid form of collateral. This move in the markets is what will keep the US dollar bid, especially in times of global uncertainty.
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One such place we can see a misfunctioning market with regards to the US dollar is in the USDCNH as the US dollar once again is bid. The Chinese Premier was in the news today after his comments about growth targets. He said China will aim for positive growth in Q2, following JPMorgan’s downgrading of China GDP forecasts to -5.4% from -1.5%. In the USA the Atlanta Fed GDP Now model for Q2 is down to 1.8% from 2.1%.
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The NZDUSD held up above the reaction level following the RBNZ rate hike. Throughout the London and US session so far, the NZDUSD had pulled back into the opening range and backfilled the impulsive move. The temptation is to fade this move and look for a lower print tomorrow but that would depend on the US dollar reaction following the FOMC meeting minutes release. So far, the DXY has traded within a small range and is finding support from the $102 level. Dollar bulls will want to see a close above the $103.25, where as a drop into the $101.50 would gather momentum from more bears piling in.
