· Oil exporter currencies held firm while the dollar found broad support as recent attacks on Saudi oil facilities and the threat of military action in the region kept crude prices kept prices elevated.
Reactions among major currencies were more muted, with the yen and the Swiss franc quickly giving up early gains made on Monday on knee-jerk safe-haven buying.
Against the yen the dollar traded at 108.11 yen, just below last week’s high of 108.265, its highest level since Aug. 1.
A major resistance is seen at 108.43, the dollar’s 50% retracement from its decline from April to August.
The euro stood at $1.10045, having shed 0.6% on Monday and the Swiss franc also weakened 0.3% to 0.9925 to the dollar.
The dollar index rose almost 0.5% on Monday and last stood at 98.624.
Another factor boosting the greenback was some exiting of bearish dollar bets in advance of the U.S. Federal Reserve’s two-day policy meeting. Traders widely expect the Fed will cut interest rates by a quarter of a percentage point this week.
“Markets are pricing in two additional rate cuts by next year but the Fed is unlikely to make such a forecast, so we could see further gain in the dollar,” said Daiwa’s Ishizuki.
· EUR/USD daily chart
The common currency, on the daily chart, is trading in a bear trend below its main daily simple moving averages (DSMAs). On Tuesday, the market will pay attention to the German ZEW survey and further down the week, traders will be watching for the FOMC on Wednesday.
EUR/USD four-hour chart
The Fiber is under pressure hovering above the 1.1000 figure and below the main SMAs. If the market break through the 1.1000 figure, EUR/USD can weaken towards 1.0970 and 1.0935
· Surging energy prices Monday helped add to sentiment that the Federal Reserve suddenly might not be in such a hurry to cut interest rates.
While markets still see the central bank lowering its benchmark overnight lending rate by a quarter point at this week’s Federal Open Market Committee meeting, the case for continued cuts seemingly has gotten weaker. Traders in the fed funds futures market on Monday were pricing in a 34% chance that the Fed will stay put on rates; the probability was zero a month ago and just 5.4% a week ago, according to the CME.
That came amid some changing economic trends as well as inflation pressures caused by a 14% jump in oil prices. Rising inflation makes the Fed more likely to tighten policy or at least hold the line rather than to cut rates.
· Prime Minister Boris Johnson’s government will try to persuade Britain’s top court this week that his decision to suspend parliament until shortly before the date for Brexit was not illegal as Scottish judges concluded last week.
In a damning judgment, Scotland’s highest court ruled last Wednesday that the suspension was unlawful and was an “egregious” attempt to stymie parliament.
· The China Securities Journal carried an opinion on Monday, citing the Chinese analysts arguing on lowering the interest rate to stimulate the real economy.
Key Quotes:
“People's Bank of China should reduce its medium-term lending facility rates.
To drive down financing costs for the real economy.
Monetary easing by central banks of major economies globally has opened up room for China to lower MLF rates.”
· China’s new home prices grew at their weakest pace in nearly a year in August as a cooling economy and existing curbs on speculative buying put a dent on overall demand.
Wary of property bubbles, Chinese regulators have vowed to refrain from stimulating the real estate sector as they roll out measures to boost the broader economy hit by the Sino-U.S. trade war and slowing consumer demand.
Average new home prices in China’s 70 major cities rose 8.8% in August from a year earlier, compared with a 9.7% gain in July and the weakest pace since October 2018, Reuters calculated from official National Bureau of Statistics (NBS) data on Tuesday.
· Hong Kong’s leader, Carrie Lam, said on Tuesday she and her team would begin dialogue sessions with the community next week, while reiterating that violence that has roiled the city over three months of protests must end.
· Oil dropped on Tuesday although the market remains on tenterhooks over the threat of a military response to attacks on Saudi Arabian crude oil facilities that cut the kingdom’s output in half and sent prices soaring by the most in decades.
The Saturday attack raised the prospect of a major supply shock in a market that in recent months had focused on demand concerns due to the erosion of global growth amid the ongoing U.S.-China trade dispute. Saudi Arabia is the world’s top oil exporter and has been the supplier of last resort for decades.
On Monday, the prices surged nearly 20% in intraday trading in response to the attacks, the biggest jump in almost 30 years, before closing nearly 15% higher at four-month highs.
· Secretary of Energy Rick Perry told CNBC on Monday that it’s too soon to say whether the U.S. will need to use its emergency crude reserves to offset the surge in oil prices stemming from drone strikes on Saudi Arabia’s oil processing plants over the weekend.
“I think the Saudis are already saying that they’re going to be able to get a third of this production back before the closing of business today,” Perry said. “There’s going to be a spike in this, but again, I want to be really clear that the market out there has a fairly substantial amount of oil available,” referring to globe reserves.
· The Saudi-led military coalition battling Yemen’s Houthi movement said on Monday that the attack on Saudi Arabian oil plants was carried out with Iranian weapons and was not launched from Yemen according to preliminary findings.
Coalition spokesman Colonel Turki al-Malki said that an investigation into Saturday’s strikes, which had been claimed by the Iran-aligned Houthi group, was still going on to determine the launch location.
“The preliminary results show that the weapons are Iranian and we are currently working to determine the location ... The terrorist attack did not originate from Yemen as the Houthi militia claimed,” Malki told a press conference in Riyadh.
· Saudi Arabia has “a great deal of explaining to do” on how it could not defend its “most critical” oil facility from drone attacks at the weekend, said Gary Grappo, former U.S. ambassador to Oman.
The Kingdom spent an estimated $67.6 billion on arms in 2018, according to Stockholm International Peace Research Institute. Saudi Arabia was just behind the U.S. and China in terms of defense spending, Grappo told CNBC’s “Squawk Box” on Tuesday.
“We’re talking about drones. Now, drones are not so easily detectable but, nevertheless, they had to be able to see that this was a strong possibility given the previous attacks they’ve experienced in previous oil facility, airports and elsewhere,” said the former diplomat who is now a distinguished fellow at the University of Denver.
Reference: Reuters, CNBC, FX Street
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