Trend Lower in Initial Jobless Claims Continues to Bolster Case for Higher Interest Rates
Optimistic labor figures continue to bolster the outlook for higher interest rates despite other metrics pointing to continued contraction in the US economy in the near-term. The latest initial jobless claims number is hovering just above 42-years lows, printing at 264,000 versus expectations of a rise to 275,000. The improvement in the claims comes on the heels of mounting job losses in shale producing states, specifically Texas which is behind a great deal of new claims. The positivity drove equity indices higher, with the S&P 500 hitting a new record. Contrary to the positivity in stocks, there are some lingering problems, mainly producer price deflation which reflects slowing demand for input commodities as supplies continue to rise. Despite the inflation, gold prices continue to rise on the back of dollar weakness.
Fears of interest rate policies negatively impacting the Euro Area are unfounded according to the latest remarks from ECB President Mario Draghi who was busy touting the gains fueled by the aggressive monetary policy measures instituted by the Central Bank. Highlighting the rebound in inflation and the sharpest uptick in growth for certain member economies which have stagnated in recent years, Draghi dismissed claims that the asset purchase program was creating imbalances in the monetary union. However, the one notable mention was the need for regional governments to continue focusing on structural reform which would aid the momentum of monetary policy. While the Central Bank has proven effective, without strong fiscal policy measures from governments, the impact of the monetary policy will likely be diminished. The Euro continues to climb against peers, benefiting from weakness in the dollar as the common currency also rebounds against the Pound.
Global oil production continues to rise despite the rout in prices as stronger production in the United States is accompanied by increased output from Russia and Brazil. Even though some Libyan output has gone offline due to protests accompanied by violence, the supply curve continues to shift outwards, reflecting growing production while demand remains relatively constant. The uptick in prices has seen more shale producers draw on stored inventories to sell output while prices are elevated so they can maximize revenues while costs remain high for tight oil projects. The number of completed well in the Bakken shale formation has hit new highs, highlighting the possibility that US production will continue to increase despite projections from the EIA that expect production to slow from June to September before picking back up. Oil prices continue to ignore the supply and demand characteristics with the uptrend largely intact.
EURCAD Head and Shoulders Trading Opportunity
Both the Euro and Canadian dollar have been gaining on the back of dollar softness as US economic data largely disappoints economist expectations. However, with accommodative Euro Area monetary policies forecast to continue well into the future and the Bank of Canada’s pause in adjusting interest rates, the EURCAD currency pair is likely to see downward pressure resume after the most recent upside rally. The head and shoulders pattern setting up in the pair has a bearish bias as the right shoulder of the pattern forms. The prevailing strategy is initiating short positions targeting support at 1.3445 with any move above the neckline at 1.3705 considered a break down in the pattern.