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Meixia Chen News, Weekly Article, ,

The Swiss Franc and it’s chequered past…

Marius Paun | London, UK | Senior dealer | Wednesday, 20th November 2019

The Swiss franc, the currency of Switzerland and its smaller neighbour state Liechtenstein, has historically been considered a haven. That is also the status of the Japanese Yen as the world’s biggest creditor and the US dollar as the currency of international trade.

There are a few reasons for these accolades. First is that Switzerland is considered an extremely well-run economy, a mature democracy with a positive trade balance and has a solid legal system. Secondly, traditionally it was a legal requirement for the franc to be backed by gold reserves. That backing was a whopping 40%, which in relative terms was a high percentage. The gold standard was terminated on May 1st 2000 following a referendum wand Switzerland was among the last countries to abandon that link. However even currently, a simple division of money supply to gold reserves puts that backing at around 20%.

So it is easy to see the Swiss francs’ appeal to investors, especially during the eurozone crisis. But as cash moved to Switzerland from struggling economies like Greece, Spain, Italy the franc soared considerably. In the process that started to hurt the Swiss economy by making exports less competitive. This, in turn, leads to a string of companies issuing profit warnings at the time and even threatening to move operations out of the country due to this increasing strength of the franc.

Consequently, on September 6th 2011 the Swiss National Bank took the decision to cap the franc against the euro at 1.20, thus capping its own currency appreciation. They added that they ‘are prepared to buy foreign currency in unlimited quantities’ (and sell their own currency). In reaction to that decision, which shocked the markets, the franc immediately lost 9% – 10% against the euro and the US dollar. Famously, the franc lost 9% against the US dollar within just 15 minutes. Nonetheless, the rally resumed shortly after and on December 18th 2014 the Swiss central bank had to introduce negative interest rates on bank deposits to support the franc cap, in a desperate attempt to reduce the demand for their currency.

However, important events on the global scene came back to bite the Swiss National Bank, showing that central bank intervention is a double edge sword. The debt crisis in the US and subsequent reactions in the euro area pushed their respective monetary policies to become more accommodative. Cutting interest rates to zero was not enough so central bankers resorted to something rather new – quantitative easing or QE.  In a few words, QE is large scale government bonds purchases to inject liquidity into an economy in an attempt to stop a deflationary spiral.

The QE program from European Central Bank was expected to weaken the euro and in turn force the Swiss National Bank to print even more francs to maintain the ceiling. Along with haemorrhaging currency reserves, there were widespread concerns that ongoing swiss franc printing would lead to potential hyperinflation. So shocking as it might seem, the SNB was forced to unexpectedly remove the peg of 1.20 francs to the euro on January 15th2015. The initial reaction saw the Swiss franc rallying a massive 30% against the euro and 25% against the US dollar. It caused chaos in the market and even forced a few foreign exchange brokers to close. The credibility of the Swiss central bank came under heavy questioning.

Interestingly enough those negative interest rates are still in place in Switzerland today!!! Recently, Thomas Jordan, Swiss National Bank chief expressed concerns about the fragility of the foreign exchange market saying they stand ready for further intervention as and when necessary.

Looking at the long-term chart in US dollar against the Swiss franc we notice the trend is by and large downward which means the franc appreciated for reasons given above. However, we can also see that since October 2011 USDCHF has been on a sideways trajectory. The price action was locked between the high of 1.0340 (tested in Nov-Dec 2015 and then again in Dec 2016, Jan 2017) and the low of 0.8290 in January 2015 (when SNB lifted the cap against the euro).

 

 

 

The 9 and 21 month moving averages have crossed each other a few times since 2011 but we know that without trending markets the signals may prove rather false.

On the way up, the first level of resistance is the psychologically important 1.0 level followed by 1.0100. Next, is the 50% Fibonacci retracement at 1.0170 from a high of 1.3283 touched on Nov 2005 and the low of 0.7066 reached on Aug 2011. Ultimately to change the intermediate outlook to bullish 1.0340 would need to be retested and eventually breached.

On the way down, the first support will be met around the 0.98 handles followed by 0.9660. Interestingly, both levels have switched a few times between support and resistance, proving reliable inflexion points. The 38.2% Fibonacci retracement at 0.9440 comes next. Further down the 0.9200 – 0.9250 channel was solid support which, when last touched, attracted enough buyers to spark a meaningful recovery. Ultimately, only a cross below 0.8290 will shift the medium-term trend from sideways to bearish.

 

Meixia Chen News, Weekly Wrap, , , ,

Weekly Market Wrap 11-15/11/2019

The trade talks between China and the US encountered an obstacle again over agricultural purchases placing world markets on alert. Wall Street Journal reported that although President Trump wants China to buy $50 billion worth of soybeans, pork and other agricultural products, Beijing does not want to commit to attaching an exact figure to the deal. Both sides are also disputing the timing and the extent of lifting the tariffs on Chinese imports. In reaction, Trump said if there is no deal, he would raise tariffs significantly.

On another note, China industrial production for October came in at +4.7% versus expectations of 5.4%. At the same time, retail sales were also a miss, rising 7.2% versus 7.8% expected, thus pressing Premier Li Keqiang to highlight the need for more support for the real economy.

The US Federal Reserve Chair Jerome Powell testified before the Congress saying the monetary policy is appropriate and the economic outlook remains favourable. He added the data is not yet pointing to either labour market or inflation heating up but the lingering risk of a slowdown in global trade remained.

Back in the UK, the preliminary GDP data for the third quarter showed an increase of 0.3% versus expectations for a 0.4% rise. Although it was slightly weaker, the figures showed Britain managed to avoid recession amid all that hype of Brexit and/or general election uncertainty. The pound sterling moved higher as Brexit Party announced they will not compete in Tory Party held areas. Furthermore, on Friday afternoon GBPUSD broke above 1.29 when the same Brexit Party stepped down from 43 additional constituencies thus helping the Tories in their quest for a majority.

On Tuesday the major European stocks indices moved up, boosted by fresh news that Donald Trump administration plans to delay tariffs on European auto imports by 6 months. Some additional good news was Germany GDP data for the third quarter. Europe’s biggest economy narrowly avoided recession as the numbers showed an increase of 0.1% versus predictions for a 0.1% drop.

The EURUSD traded within a tight range of fewer than 80 pips for the whole week and looks set to post only a marginal increase (around 1.1050 Friday afternoon).

In a surprise decision, the Reserve Bank of New Zealand held its benchmark interest unchanged at 1% sending the NZD sharply higher. RBNZ cut 50 basis points at the August meeting but this time they said, ‘if things deteriorate will keep cutting but there is not enough information to go lower now’.

Costas@CPTMarkets News, Weekly Article, , , ,

Lack of volatility in oil prices. But is this about to change?

If anyone needed stone-cold proof that crude is out of fashion at the moment, they only need to look at the market’s reaction to last week’s oil news.

Last Monday on the 4th of November, in the United Arab Emirates, the Supreme Petroleum Council announced the discovery of new hydrocarbon reserves estimated at 7 billion barrels of crude and 58 trillion standard cubic feet of conventional gas. The find is in the category of ‘elephant size’ bringing the UAE’s total reserves to over 100 billion barrels of crude and over 270 trillion cubic feet of conventional gas.

In order to understand the size of this find in context, we can compare it with other oil fields. The biggest one, Ghawar in Saudi Arabia has some 90-100 billion barrels of reserves and the second one, Burgan in Kuwait also has around 70 billion barrels of oil. But have a look at the rest of the top 20 oil fields and most of the oil fields have between 15 and 30 billion barrels of reserves. So, the discovery was big enough to move the country one place up from the seventh to sixth place in terms of oil and gas reserves.

Following the announcement, one could expect the crude price to spark a sell-off. But it did not, if anything it went up a little and by and large it has been trading sideways ever since.

Looking at global oil consumption, we currently use around 100 million barrels per day. We also know that world demand amounted to about 85 million barrels per day in 2009, so oil consumption rose by around 17%-18% in the last decade. Given all the noise around the trend to alternative energy, subsidies going into renewables and the whole political pressure to switch from fossil fuels to green energy by 2030 or so, you might expect oil consumption to have fallen. But that is not the case, at least not yet, and data continues to show rising demand in crude almost every year.

On a side note, the US government data showed last Tuesday that for the first time since 1978, the US recorded a $252 million surplus in oil trade. The value of US crude exports was just under $15 billion while imports were $14.7 billion. So where does this leave the much-trumpeted Saudi Aramco IPO-initial public offering?

The world’s biggest oil and gas company has finally decided to go public, sometime in December. Gulf news reports that Crown Prince Mohammed bin Salman said he wants a $2 trillion valuation, thus looking to raise funds to diversify the Saudi economy away from oil by investing in non-energy industries especially high tech. Saudi Arabia hopes to float only 3% of Aramco and as a result to raise $60 billion.

Now if the history is anything to go by when Glencore went public in 2011 it marked the top of the commodities cycle. Additionally, when Barclays and RBS both went after ABN Amro in 2007 it marked the peak of the banking bubble. Ironically the winner (RBS) of that deal proved to be the big loser in the end as the extra debt came back to haunt them. The conclusion is that only irrational exuberance associated with the market top can convince investors to back such a massive deal.

But as we showed in the beginning, this IPO seems unusual in that it is being proposed when crude prices are nowhere near their record highs; in fact, quite the opposite. So that makes the process look like an IPO done out of necessity. So, if this is not the top of the crude market, could it be the bottom? Only time will tell but last week US oil drillers cut an extra seven oil rigs bringing the total countdown of operational rigs down to 684, the lowest since April 2017.

It is widely argued that lingering uncertainty over US-China trade relations is keeping a lid on oil prices. Last Friday brought renewed concerns as President Trump downplayed reports of an imminent lift of tariffs as part of a ‘phase one’ agreement. That rumour had originally boosted markets during the previous few sessions. However, the constant back and forth on the trade disputes seems to be trumping any other fundamental news.

Below is the price of US crude oil prices over more three years. It’s currently around $57.40 a barrel.

We can see two strong areas of support around $42.50 and more recently from June this year to October it held its ground just below $51.00 support base. The latter also matches 23.6% Fibonacci retracement from a high of $76.79 seen on 30th of September 2018 and a low of $42.42 touched on 23rd of December last year. So, while crude enjoyed a rebound since September, on a medium-term basis is still on a downtrend trajectory.

Immediate support is seen around $56.00 mark which during the current year shifted between support and resistance quite a few times. Further down $54.50 and $53 are also levels to watch.

On the way up, resistance around 58.50 level will be the next target followed by the 50% Fibonacci retracement at $59.65. Bulls will then keep an eye for $62.5 to $63.00 area. But only a break above the $66.55 mark, the high of 23of April this year will convincingly change the medium-term outlook to sideways.

The short-term moving averages (9 MA) seems to be on course to cross above the longer-term one (21 MA) which should be encouraging for the bulls.

Meixia Chen News, Weekly Wrap, , , ,

Weekly Market Wrap 04-08/11/2019

Although the tension between China and the US appears to be thawing somewhat, there are still bits to be agreed before they sign the Phase One deal. For example, China would like the 15% tariff imposed by US President Trump on September 1st to be removed whereas the US wants China to buy $50 billion worth of agricultural products. China Global Times added that ‘both countries must simultaneously remove the existing additional tariffs at the same ratio’. Donald Trump is yet to make a decision on the subject.

China continues to strengthen ties with European countries. During President Macron’s recent visit to Beijing, aircraft engineering was on the table with Airbus ready to become a competitor for Boeing in China.

The happy days for the US stock indices have returned as all 3 majors made record highs. It seems that investors’ sentiment improved, shrugging off uncertainty from the US-China trade war. Aligning this with the very good reporting figures, where over 75% of the US companies have surpassed expectations so far, has meant that the risk-on mood has certainly made a comeback in the US stock markets.

Back in the UK, it’s now official that the country will go to the polls on December 12 to elect a new Parliament. Although some analysts on both sides are trying to convince the public it is about a lot more than Brexit the fact that both sides have lined up big spending plans is saying, in fact, Brexit will be the main deciding topic. Polls suggest that, so far, the Conservatives have managed to maintain their lead and pound sterling has been rangebound 1.28-1.30 to the US dollar.

Meanwhile, the Bank of England left the bank rate unchanged at 0.75% although surprisingly 2 out of 9 members voted for a cut. They justified their action by saying that ‘stimulus is needed as data suggests the labour market is turning and the downside risks from the global economy still linger’. However, the short-term pullback was quickly reversed and the currency remained in the previous range.

Despite disappointing numbers coming out of Germany, the EU largest economy, for quite a few months, optimism in the region does not seem to fade. They continue to deny the need for any sort of fiscal stimulus so much so that some analysts are calling European decision-makers either daydreamers or foolishly overconfident… Only time will tell, but a case in point is the German press quoting EU’s ex-President Junker saying that ‘Donald Trump will not implement auto tariffs on EU automobiles. Trust me, I know what I’m saying’!!! We shall see who is right.

As widely expected, the Reserve Bank of Australia held its benchmark interest rate at 0.75% but added that it stands ready to ease policy if needed. They also said the outlook was little changed from 3 months ago with inflation expectations around 2% for the next year and unemployment dropping below 5%.

Meixia Chen News, Weekly Article, ,

Silver and its ratio to gold

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Marius Paun | London, UK | Senior dealer | Wednesday, 6th November 2019

If someone would be interested in gauging how cheap or expensive the price of silver is right now, probably the simplest method is to look at gold to silver ratio. The ratio measures how many ounces of silver it takes to buy an ounce of gold. If it is 100 it means gold is 100 times the price of silver. As such if the ratio is high then silver is rather cheap on a relative basis and possibly a trade to sell gold and buy silver could be considered. If the ratio is low, then gold might be considered cheap and the opposite trade might make sense.


Why is the gold to silver ratio important and closely followed? Simply put because of history. Both metals have been in use for thousands of years, so they really stood the test of time, giving us plenty of data to consider their relative value.


As it happens, geologists seem to agree that there is around 15-17 times more silver in the Earth’s crust than gold which means gold is therefore 15-17 times rarer. So theoretically, the so-called natural ratio between the two is around that level and to mirror that, gold should be 15-17 times the price of silver. And history provides us with some clues. In ancient times, when both metals were used as currency, the ratio between them was fixed officially by royal decree. For example, in Greece, the ratio stood at 13 ounces of silver to gold and in Rome the fix was 12 to one. In the USA which had a bi-metallic standard until 1875, the ratio stood at 15. Nevertheless, moving into the 20th century, gold and silver both have been abandoned as currency and we saw that ratio moving a lot higher. In April 2011 when silver reached $50 an ounce, the ratio went to 30 but that low mark by recent standards was rare and short-lived during the last century. Today it stands at around 85. By historical standards, the ratio is now extremely high.


For all its potential as a great investment, its qualities of being both an industrial metal and a precious metal, the truth is that since it has lost its monetary status silver has never delivered. One day probably it will go back but hey ‘markets can stay irrational (from that point of view) longer that one would stay solvent’ goes the saying so caution should also be applied. So for those who think reversing to the mean might one day happen, the ancient ratio and /or the natural ratio of 15-17 is a good reference point.


One significant use for the gold to silver ratio is the credit markets. When the ratio is rising i.e gold is outperforming silver, it can be a possible indication of credit stress associated with tightening. In that case, silver drops quicker than gold. Conversely, when the ratio is falling and so silver is the outperformer it is likely that we are in an inflationary period with credit actually expanding. That’s because of silver’s industrial metal qualities and the fact that it tends to outpace gold on the way up.


Physical silver has always remained a reliable store of value, despite no longer being a medium of exchange. A similar story applies to gold. As we mentioned before silver is cheap on a relative basis and is more practical for every day small purchases. CPM Group, the commodity research company, points out that silver inventories have collapsed, dropping over 70% since the 1960s. They also add that most the governments no longer hold stockpiles of silver and officially only US, India and Mexico warehouse silver.


Global silver supply has peaked at around 1000 million ounces in 2014-2015. By and large silver is a by-product from gold, copper and zinc operations. So with commodities entering a downturn, miners were forced to cut costs. As a result, exploration and development of new silver mines were reduced dramatically.


At the same time, demand is growing. Believe it or not, silver is used in almost every major industry due to its conductivity: electronics, medical applications, renewables. The demand is split between industrial uses (about 55%), jewellery (35%) and investments in the form of coins and bars (10%). China may be slowing down due to its trade dispute with the US but the total silver demand in China has increased over 5 times since 2000!!! So, fundamentals for silver are rather encouraging.
Let’s look at the technical…

The long-term trend is clearly down. However, silver has been moving sideways for the past 6 years, largely within $14.00 – $22.00 range.

On a 10-year chart, silver touched a low of $12.4 in July 2009. It then rose incredibly fast reaching a high of $49.78 in April 2011. Since then it collapsed almost as fast, retesting the lows within the next 24 months or so.
We can see the short-term moving averages (9 MA) crossed above the longer-term ones (21 MA) and both beginnings to point upwards now. So, the short term is bullish with a low of $13.9 touched in November 2018. But the medium-term trend is sideways so that tends to make the moving averages less reliable. They fare better in trending markets.


On the way down, support just below $17.00 mark is the next target for the bears. It will be followed by $15.70 and $14.00 which has been retested unsuccessfully a few times in 2015 as well as November last year.


On the way up, bulls will look to break above $18.50 which acted as good resistance numerous times going back to 2009. It could be followed by $19.50 but ultimately a breach above $21.10, the high of July 2016 will shift the medium-term trend to bullish. That also matches the 23.6 Fibonacci retracements.

Meixia Chen News, Weekly Wrap, , ,

Weekly Market Wrap 21-25/10/2019

In a sign that the Sino-US disputes could be thawing, China Vice Premier Liu He said both countries made ‘concrete progress’ towards trade war deal in Washington, many concerns have been addressed laying the foundation for signing a ‘phased deal’.

On the other side of the fence, the US Trade Representative Robert Lighthizer reiterated that his country is targeting the Phase 1 trade deal with China before the Chile APEC summit scheduled for November 16-17 this year. What’s more Larry Kudlow, Director for National Economic Council said if Phase 1 goes well, then December tariffs could be taken off, something that China has asked for already. On top of that China issued 10 million tonnes quota for US soybeans purchases according to Reuters. It may not be 40-50 million initially reported but it’s a start. Is that encouraging?

There were considerable hopes last Saturday in the UK that a vote on UK Prime Minister Boris Johnson’s latest deal with the European Union will take place and thus make things a bit clearer as to the direction of the whole Brexit affair. However, the UK Parliament decided to delay the vote until ‘the document is properly studied and legislation is prepared’. The optimism was out of the window as by midnight Boris Johnson was forced to write a letter to the EU requesting yet another extension. He did so, and now the EU has to decide if, under what conditions and for how long they will offer that extension. Unsurprisingly, the pound sterling started the week on the back foot, paring some of those recent gains. It is still trading just above 1.28 against the US dollar after reaching 1.30 mark, well off the lows of a couple of weeks ago. Is there really light at the end of the long Brexit tunnel?

Bloomberg reported that ECB policymakers don’t expect any more monetary stimulus, even if the economic outlook weakens. As anticipated Brexit drama kept European officials busy too. Many now view a certain amount of flexibility in allowing for an extension. ECB Chair Mario Draghi had his final meeting on Thursday. Amid leaving the benchmark interest rate unchanged at 0%, he said the downside risks are significant but inflation remains muted. Otherwise, it was largely a non-event regarding price movement.

One interesting fact mentioned is that the ECB will run out of bonds to buy according to the new quantitative easing schedule sometimes around the end of 2020!!! It will be intriguing to see if they plan to relax the criteria of the bonds they can purchase. Anyway, getting some sort of direction from the pound, the euro also gave back some of the recent gains, trading around the short-term moving averages, just below 1.11 to the dollar.

Meanwhile, Bank of Japan said they see no reason for a rate cut later this month at their monetary policy meeting, emphasizing that their ammo should be saved in case things get considerably worse. The yen moved rather sideways for the week with investors also on stand by ahead of the next week BOJ meeting.

Meixia Chen News, Weekly Article, ,

Is Platinum really doomed?

Marius Paun | London, UK | Senior dealer | Friday, 23rd October 2019

Platinum is an industrial metal and specifically a metal widely used in the car industry. Today it is mostly produced in South Africa and Russia. It is part of the so-called platinum group metals together with palladium and rhodium. By and large the price of the various components of the group will be determined by the popularity and production levels of the type of vehicles on the roads in the future. Will it be a mixed of electric and petrol cars with diesel vehicles slowly becoming obsolete as appears to be the case now? Or will diesel cars reverse the trend and come back into fashion at some point?

So, although platinum is part of the jewellery industry as well, its main use is in diesel cars and, to be exact, in the catalytic converters used in the diesel engine. The role of platinum in converters is to oxidise carbon monoxide and hydrocarbons. It is also known that its ‘sister PGM metal’ palladium, tends to be used in petrol engines. Apparently, platinum can be a substitute for palladium in petrol engines but that would only make sense when palladium price is well above the platinum’s i.e. close to double in price. And guess what… Currently, we are not far off that difference in prices. So, it is fair to say that the car industry might be pondering that substitution sometime in the near future.

Currently, there is a well-reported hype regarding electric cars, which are scheduled to replace diesel and petrol cars, and that hybrid cars are the temporary solution to make the smooth shift towards electric vehicles. For example, JP Morgan predicted that hybrid vehicles will account for around a quarter of global sales by 2025. Nonetheless, the hybrid cars still use fuel, hence over 90% of cars will still have an internal combustion engine in the next five years.

A few years back, we had the famous Volkswagen diesel scandal which sparked a whole array of changes in regulations and public opinion perception. It also delivered an almost fatal blow to the demand for diesel vehicles in Europe whilst the demand for petrol engines has actually increased. This trend was reflected in the prices of platinum which went sharply down and palladium which soared. To put things into context, before the scandal it was not unusual to see the price of platinum at least three times that of palladium.

Assuming that the shift to petrol-based engines and hybrid cars will continue to happen on a large scale, what could stop cheap platinum replacing the more expensive palladium going forward? One scenario circulated in the financial media could be hydrogen fuel-cells vehicles. Natural gas has become all of a sudden plentiful in the USA and is the primary source of hydrogen for commercial vehicles. However, batteries are currently impractical for commercial haulage fleet, without innovation to battery technology meaning hydrogen fuel cell could be a viable alternative to diesel. Most importantly, in favour of platinum, it is also the catalyst in fuel cells.

Looking at the fundamentals, demand for platinum is split between catalyst converters for diesel vehicles around 40%, about 30% jewellery, 20% industrial uses and the rest around 10% for investment purposes. The yearly demand has been over 6 million ounces since 2004 with very few exceptions. It is also predicted to reach 15 million ounces from the car industry alone by 2040 with the bulk coming from fuel cells vehicles seen as the potential ‘rescuer’.

What’s interesting is that there is constantly a big gap between supply and demand-, with demand outstripping new global production by almost one third. To counter this, the difference has been made up by recycling and selling off the existing stockpiles. South African miners’ inventories have been destocking and so far have been managing to make up for the lack of any new massive discoveries, or lack of investments to boost production. Could that de-stocking continue for long? Let’s wait and see.

During the commodities boom before the 2008 credit crisis, platinum enjoyed an absolute massive rally. It started at a low of $350 an ounce before 2000 and moved up steeply reaching a high of $2299 an ounce in March 2008. It crashed then even faster in 7-8 months to $750 an ounce. After that it embarked on a steady multiyear rally to a high of $1912 touched in August 2011 but since it was a downward trip. It hit a low of $754 in August last year not far off from the low of 2008. It has been struggling for any meaningful gains since retesting that low but it felt like a dead cat bounce. It’s now sitting rather quietly swinging around $900 an ounce handle.

As per usual the first thing to notice is the long term and that’s down.

However, drawing the trend line (red) we can see it has been broken on the upside in July this year. In addition, our moving averages, 9MA and 21 MA have recently reversed course and are now pointing upwards. What’s more, the 9 MA has crossed above the 21 MA.

On the bullish side, we can see the next resistance level around $940 which posed problems (it took a while to breach) on the way up but also on the way down during the last few years. It will be followed by $1028 mark but surely the bulls will keep a close eye on the 23.6% Fibonacci retracement at $1118.

On the way down $850 level seems to act as the next immediate support which was retested unsuccessfully recently. If that is to be broken, then the bears will be looking at $810 but ultimately the multi-year support just above $750 will come into focus.

Meixia Chen News, Weekly Wrap, , ,

Weekly Market Wrap 14-18/10/2019

The week started with China trade data for September showing both imports and exports declining more than expected. However, the surplus was 280 billion yuan, above 253.8 billion anticipated and up from 240 billion seen previously. Bloomberg reported that China wanted more talks before signing Trump’s ‘Phase One’ deal which increased investors’ optimism last week. It added that Beijing also wants President Trump to scrap the planned tariff hike in December. At the time of writing, we have not seen the White House response!

The US stepped back from Syria and Turkey immediately moved right in and started to displace the Kurdish rebels. International media, as well as a few senior US Republicans, were quick to point out ‘the treason’, as Kurds are considered to have been one of the main contributors in the battle to defeat ISIS. So President Trump made a small retracement and looks poised to impose sanctions on Turkey, which subsequently sending the Turkish Lira lower. After appearing defiant initially, Turkey stuck to its original plans of assuring a buffer zone between the southern border and the Kurdish rebels and eventually agreed to a cease-fire. The US dollar was on the back foot for the week as a string of optimistic news stories pushed investors out of their recent ‘risk-off’ mode.

In the UK, Bank of England joined the US fed in saying they don’t favor negative interest rates and they see using other monetary tools as being more effective. In other places, notably Europe there is a clear trend underway of utilising negative interest rates in order to force banks to lend more.

On Tuesday it was reported that the EU and the UK were closing in on a draft Brexit deal conditional of getting DUP (ruling party in Northern Ireland) support. As a result, the GBPUSD who was already on an upward trajectory moved sharply higher to above 1.28. Indeed, two days later both sides i.e. EU leaders and UK Prime Minister Boris Johnson, came out announcing they finally reached a Brexit deal. However, there still appears to be one last significant hurdle to overcome before all is settled: the deal needs to be sanctioned by the UK Parliament… and we all know what happened the last time. Parliament is to hold the vote on Saturday. Despite this uncertainty remaining, overall the market views this as a positive week of news and the pound sterling continued to rally sharply, getting within touching distance of 1.30 handle, only to retrace slightly on Friday. The feel-good sentiment also lifted the EURUSD which moved up above 1.1150, a level last seen at the end of August this year.

In Australia, the minutes from the latest Reserve Bank of Australia meeting in October indicated the central bank readiness to cut again, to support growth and jobs. It added that mining and the housing sectors have reached turning points. The Aussie dollar took advantage of relative calm on the US-China trade disputes and managed to recoup some of its recently lost ground, reaching 0.6850 to the US dollar. It got extra help from a lower jobless rate report.

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What’s behind the spike in oil prices?

First the facts:

Saudi Arabia’s oil production was crippled last Saturday making headlines worldwide. It’s now known that the world’s largest crude processing facility in the country and its second-largest oil field were knocked out by a series of drones strikes. The Saudi facility, Abqaiq is an important part of preparing the oil (removing impurities) to be sold to market. The hits were allegedly extremely accurate, targeting vital segments of the treatment infrastructure.

It was reported that Aramco, Saudi’s national oil company had no alternative but to cut production by 5.7 million barrels per day or roughly 50% of its capacity. That also represents about 5% of the global oil supply. As a consequence, the US oil prices spiked by 15% at the opening, moving above $62 from a low of $54.75 at the close on Friday. The last time we have seen this sort of price spike was in 1990 when Saddam Hussein invaded Kuwait, so it is understandable that serious alarm bells were raised.

So, who was responsible?

It is public knowledge that Saudi Arabia has been involved in the war in Yemen, going back a few years. Houthi rebels, who are backed by Iran, claimed responsibility for the attacks admitting they used drones. History shows they have attempted to use drones in the recent past in similar attacks, but those were largely intercepted.

However, the US is highly sceptical about that scenario, pointing the finger at Iran. President Donald Trump said the US is ‘Locked and loaded’ and they are waiting on Riyadh to verify and confirm who launched the strikes before giving the green light. To calm things down, he added that he ‘authorised the release of oil from the strategic petroleum reserve to keep the market well supplied’. Iran, on the other hand, denied involvement and dismissed the allegations as ‘meaningless and pointless’.

Yesterday, Saudi Energy Minister Prince Abdulaziz bin Salman did his part in trying to restore confidence. He held a press conference assuring the market the Kingdom would have its oil supply back online by the end of the current month. That was enough to allow US oil prices to pull back, now trading just above $58 a barrel.

Even President Trump seemed to have changed his mind about releasing oil from the strategic reserve because ‘prices have not jumped very much’. Although the immediate crisis seemed to have been averted, the spectre of further escalation in the region’s tensions remains elevated. Saudi Arabia’s budget for defence apparently ranks third in the world nowadays behind the US and China. If a few rather cheap drones can get through and cripple key oil facilities what’s to stop that from happening again?  Is Gulf war 3 out of the question? Heated exchanges between the US and Iran are quite common these days with ships from both sides detained.

Wednesday, the US decided to increase sanctions on Iran instead of military action which might allow further retracement in oil prices. Although the genie is out of the bottle in terms of risk premium, there are plenty of voices out there saying that US-China trade war will probably keep demand for oil in close check and in turn override any ongoing tensions in the Middle East region.

The chart shows the long-term trend is still down.

Before the spike, US oil prices were rather in the consolidation phase. The gap which happened on the opening Sunday evening was quite significant and we know that sooner or later that gap will need to be filled. Already the market price is on its way down, doing just that.

However, the short-term moving averages (9MA) moved above the longer-term ones (21MA) at the end of August thus giving bulls reasons to be joyful.

On the way down, immediate support is seen around $57.2 mark, which acted as a rather strong resistance (turned support) recently. Further down $54.75, $53 are also levels to watch. Ultimately $50.50 to $51 area was tested a few times this year and held, eventually triggering a sizeable jump.

On the way up, resistance just below $60 is the next level bulls will target follow by $61 and $62.5. If the $61 is broken then the medium-term trend will switch to bullish ($50.5 to $62 is the sideways trend since the mid-May). Nonetheless only a break above the $66.55 mark, the high of 23rd of April, will convincingly change the long-term outlook to bullish.