The US currency lost half a percent on Tuesday after the weaker-than-expected durable goods orders report. The bullish statements by the European and Asian central banks, as well as, low probability of a US rate hike do not help the American currency. The Oil prices also took advantage of the Dollar’s slump, being fuelled by an uncertain outlook for the future consumption and possible demand recovery on the global market. Nevertheless, speculators are edging down Oil contract longs for the third consecutive week. In the week ending on June 23, net positions fell to 328.8K contracts from 359.0K contracts a week earlier. This suggests that investors are losing hope in the cartel ability to deal with the growing supply from North American producers. In May, members of the cartel agreed to extend the agreement for nine months, leaving a cumulative production decline of 1.8M barrels unchanged. The pact expires in March 2018.
The countries that have not joined the agreement, such as Nigeria and Libya, are under pressure from OPEC. The drop in Oil prices coupled with the inability to increase production cuts forces the cartel to resort to a non-standard solution. Iran can also add pessimism, which, as part of the deal, could increase production to 4 million barrels per day.
Due to the desperate situation on the Oil market formed on the side of supply, the further price action will hinge on the outlook demand of the three main Oil consumers – China, India and Japan. On the bearish side, there is declining activity in the Chinese manufacturing sector which reached it´s peak of 52 points in December then moved to rapid declines in the first quarter of 2017. In Japan, the manufacturing activity is still in the growth zone, but it also shows a decline from the beginning of the year. Also, the Indian and Chinese governments released plans for electric vehicles, according to which 1/5 of transport vehicles in China should consume alternative fuel by 2025, while in India all cars will have to be switched to electric motors by 2032. According to IEA calculations, gasoline consumption in China and India is 11% and 2% of total world consumption.
The European currency jumped against the Dollar after the ECB President Mario Draghi, stressed the temporary nature of the hindering factors of most inflation growths, yet he defended the need to stimulate the economy. According to Draghi, signals coming from various sectors indicate a general recovery and the replacement of deflationary forces by reflationary ones, but extensive credit support is required to give inflation stability. At a previous ECB interest rate meeting, Draghi described the risks to the economy as “broadly balanced” changing the wording from “tilted towards the downside”. It is obvious that the ECB is finding it increasingly difficult to restrain market optimism, but the cheap Euro is needed to stimulate production activity in the economy and to support the demand of the European producers for energy. From the official’s comments, it can be concluded that the QE reduction may begin before the refinancing rate is raised – this is also evidenced by the increase of the German bond yields by almost 20% on Tuesday.
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