OPEC Meeting, AUDUSD and JPY

Today’s market focus will be on whether Saudi Arabia can persuade Iran to make oil production cuts. Expectations going into the meeting are fairly balanced, with crude futures traded in the past 30 days showing that net shorts added are not statistically large. OPEC likely needs a cut if there is any hope for rebalancing in 2017 but   there are increasing risks of there not being a market-friendly deal today. Our favoured way to play for oil price weakness is to sell NOK as the domestic politics and already long market positioning make this currency vulnerable. We prefer to trade USDNOK over USDCAD as Canadian data should remain strong today and the pair become less sensitive to oil price movements this year, driven more by rate differentials.

Australia’s current account deficit position makes AUD vulnerable to global rates and risk sentiment. Today that sentiment may be set by the outcome of the OPEC meeting and US data, but beyond that we need to turn to Australia’s domestic economy. Here we are seeing signs of cracks appearing, with Australian building approvals in October falling at their fastest pace (-12.6%M and -24.9%Y) since the Lehman crisis in 2008. The fall was particularly led by apartments, whose approvals fell by almost 25% in one month. We note that the data can be volatile but do offer a sign that construction companies have already got a lot of building work in the pipeline and may be starting to get worried about future demand.

The rise of US long-end Treasury yields may have taken a breather as markets have fully priced a 25bp Fed hike in December but that doesn’t stop us from buying USD. US economic data continue to come in strong, driven by both the consumer and business sentiment. Yesterday, Conference Board consumer confidence rose to a new cycle high (107.1 after 98.6) and our Capex Plans Index surged, suggesting further upside to investment spending. The momentum in US economic data strength may continue today with the release of ADP employment data and US PCE. We would position for USD strength via buying USDJPY. The fall in the cross USDJPY currency basis is making unhedged foreign investments more attractive. We believe that changing hedging ratios for the Japanese community will drive the next leg higher for USDJPY.