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    IronFX Daily Commentary | Oil prices edge higher partly due to US blizzard | 25/01/2016

    25.01.2016, 10am

    • Oil prices edge higher partly due to US blizzard Oil prices and Asian stock markets began the week on a stronger note, extending Friday’s gains, after a blizzard paralyzed much of the US east coast during the weekend. The rise in oil prices came as a result of investors speculating a rise in demand for heating oil and natural gas in the near future. Prices got an additional boost from the supply side last week, after the reported number of US active oil rigs dropped by 5 to 510, extending a recent streak of declines. If the cold continues in the following days, oil prices may gain even further, mainly due to a possible increase in demand. However, even if the oil prices remain supported in the event of a prolonged period of cold weather and oil-related currencies like CAD and NOK gain a bit further, the advance could be short-lived as the overall trend of oil is still a downtrend. We still believe that the structural conditions surrounding the oil sector remain unchanged. As a secondary effect coming from the cold weather, the US growth could slow in the first quarter of the year as a decline in consumer spending and a fall in retail sales could impact the country’s performance. On top of that, if federal government offices along with state and local government offices remain closed, this could interrupt the usual operations and further deteriorate growth in Q1. If the country remains paralyzed for an extended period of time, this could prove USD-negative.

    • Today’s highlights: During the European day, the German Ifo survey for January is due to be released. The forecast is for both the business climate and expectations indices to decline a bit. This is somewhat in line with the ZEW survey for the same month, which showed that business expectations for the German economy have been affected by the slowdown in China and other EM economies. Given the latest soft data out from China, the expectations index could continue to decline in coming months, perhaps until China and the other EM economies begin to recover, or at least stabilize. Thus, we expect that the decline in the Ifo indices could add some selling pressure to the common currency, at least at the release.

    • From the US, the Dallas Fed manufacturing activity index for January is coming out, though no forecast is available.

    • We have only one speaker scheduled on Monday’s agenda: ECB President Mario Draghi speaks.

    • As for the rest of the week, the highlight will be on Wednesday when two central banks hold their policy meetings: the Fed and the RBNZ. At their last meeting, Fed officials unanimously voted to increase the target range of the federal funds rate by 25bps. In the statement, the FOMC stressed that the path of future policy will be gradual and determined by incoming data from the labour market and signs of inflationary pressures. They noted that the labour market has improved further, which they expected to continue, and that inflation has been running below target partly due to declines in energy prices. Since then, incoming data have shown further improvement, with December’s NFP figure surging and the CPI for the same month accelerating, albeit below expectations. Despite these considerable improvements, we expect the Fed to hold its fire at this meeting. Firstly, while the NFP number rose in December, the hourly earnings growth rate remained flat. This may indicate that near-term inflation pressures could remain somewhat subdued. We expect the FOMC to see at least inflationary pressure moving higher before raising rates again. The renewed fall in oil prices since the latest meeting, along with the flat wage growth may put downside risks to the Fed’s inflation outlook. Additionally, the global outlook has deteriorated considerably since December, and while Fed speakers have stated that this does not substantially affect the US economy we could see a shift in the tone of the statement that shows some concerns about the recent developments.

    • On Tuesday, we have no major events or indicators due to be released.

    • On Wednesday, besides the Fed meeting, the Reserve Bank of New Zealand will also meet to decide on monetary policy. After a reduction of the official cash rate by 25bps at its last meeting, we expect the Bank to remain on hold, despite the close to zero inflation and the slowdown in China. Instead of a rate cut, we expect the Bank to push back the date by which it expects to meet its target, while leaving the door open for additional easing should the risks around the inflation outlook increase further.

    • On Thursday, the preliminary UK GDP for Q4 is due to be released. The forecast is for the growth to have accelerated to +0.5% qoq from +0.4% qoq. Under normal circumstances this should offset some of the recent soft data and bring forward expectations for a BoE rate hike. Nevertheless, given the recent comments by BoE Governor Carney that now it’s not the time to raise rates, and having in mind the uncertainty surrounding the “Brexit” referendum, we believe that the Bank could be reluctant to hike until there is greater clarity on Britain’s position within Europe. In Germany, the preliminary CPI rate for January is expected to accelerate. If the forecast is met, this could increase the likelihood that Eurozone’s CPI to be released on Friday could rise as well. From the US, we get durable goods orders for December. Both the headline and core figures are forecast to fall slightly after stagnating the previous month. The expected fall in durable goods could ease some of the dollar’s recent gains.

    • On Friday, during the Asian morning, the Bank of Japan will end its two-day monetary policy meeting. At its latest meeting, the BoJ launched additional measures in a surprise move, aimed at encouraging corporate spending and hiring. Through these measures the Bank intends to stimulate wage growth in the private sector and boost inflation over the longer term. We expect the BoJ to leave policy unchanged at this meeting and Gov. Kuroda to maintain his optimistic view that the underlying trend in prices is improving. From Eurozone, the preliminary CPI for December is expected to show an acceleration from the previous month. Although this contradicts ECB President Draghi’s recent statement that inflation is expected to run very low or negative in coming months, as inflation has been stuck near the zero bound for a long time, any acceleration could support the common currency.

    • In the US, the initial estimates of Q4 GDP growth and core PCE deflator are due to be released. Both are expected to have slowed from the previous quarter.

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