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Brent Spike Spurs Focus on Russian Ruble, CAD, Norwegian Krone Today

10/01/2018 11:19 am EST

Focus: FOREX

Robert Savage

Partner & CEO, CCTrack Solutions

The energy producers are usually winners when oil is higher – and this shows up in Canadian dollar (CAD), Norwegian krone (NOK) and Russian ruble (RUB) particularly. But taking out the NAFTA noise it’s interesting to chart the RUB today, writes Bob Savage Monday.

The last-minute deal between the US/Mexico and Canada preserves NAFTA with a new name USMCA. The deal revises rules surrounding automobiles, the dairy sector and intellectual property, but does not resolve end the controversy surrounding U.S. tariffs on steel and aluminum.

Both Canadian dollar (CAD) and Mexican peso (MXN) are stronger against the U.S. dollar (USD) this morning. The markets are trading with a pocketful of hope that trade negotiations and Trump tweets are noise, leaving markets to believe in global growth and stability.

Economic data now matters to the path forward as the uncertainty of monetary policy rests on the central bankers’ response function to surprises, less tweets and elections. Witness the move up in Korean rates as the PMI report rises and the labor component at 5 ½ year highs sets up speculation for BOK rate hike.

The Japan Tankan drop in sentiment was offset by the rise in CapEx leaving the BOJ time to do nothing, with focus on the longer-end buying games into tomorrow’s 10-year JGB sale.

For Europe, the PMI reports aren’t weak enough to offset the ECB plans on QE end and so the EUR holds but rates are higher.

On the other hand, politics remain front and center in Europe though their effect on forex and bonds seems more limited.

1) Italy. 2-year BTPs sold off moving from 1.05% to 1.11% on a report in La Republica suggesting that the EU Commission will reject Italy's budget proposal in November has further fueled uncertainty over the budget.

2) UK Tories continue to split over Brexit while UK PM May continues to push her negotiations. Her speech Oct. 3 maybe a key market event. Gilts open lower, British pound (GBP) holds with better PMI. This leaves today to the U.S. political mood and the economic data with a balancing act in between.

The mood for risk is high and so few expect much to derail the rush to new highs for equities in the U.S. There is a pesky risk barometer out there to consider – the rise of oil to $83 in Brent opens questions of whether this is a tax on global consumer demand.

Throw in the weather shift and risks to NatGas prices in Europe thanks to US/EU sanctions on Russia and you have the makings for trouble in energy prices driving up inflation and leaving less room for growth.

We have seen this story before and it doesn’t end well. The energy producers are usually winners when oil is higher – and this shows up in CAD, Norwegian krone (NOK) and Russian ruble (RUB) particularly. But taking out the NAFTA noise it’s interesting to chart the RUB today and think through whether the oil gains are reaching a tipping point for trouble. Watching 66 for such a signal but expecting momentum on oil and risk to lead us to 61.50.

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