Political Shake-Up in Saudi Arabia Buoys Oil

Daily Analysis - 07/11/2017

Saudi Crown Prince Mohammad bin Salman Continues to Consolidate Power


Oil prices rallied on Monday, hitting their highest level in more than two years after Saudi Arabia’s Crown Prince fortified his power in the Kingdom by launching an anti-corruption drive. Mohammed bin Salman, a vocal supporter of OPEC extending its production curbs, detained a host of princes, ministers and other high-ranking officials over the weekend.

Price Action Suggests Path of Least Resistance for Oil is Higher

Saudi Crown Prince Salman’s efforts to shoring up his power base has increased the likelihood of Organization of the Petroleum Exporting Countries prolonging its production cuts at a meeting in Vienna at the end of November. Oil prices were also supported by rising tensions between Saudi Arabia and Iran after the former-led military coalition fighting the Houthi movement in Yemen closed all Yemeni land, air and sea crossings.

Riyadh and its Gulf allies have repeatedly said they hold Iran responsible for the Yemen crisis. January Brent futures soared 3.50% to finish Monday at $64.12 a barrel. For the Brent, it was the biggest single session dollar gain since December of 2016. Prices are currently consolidating within a narrow range in early Tuesday trade, with the area around $65.00 per barrel likely to act as a key upside resistance.


RBA Holds Rates and Issues Warning on Household Consumption

The Reserve Bank of Australia left the benchmark cash rate on hold at a record low of 1.50% for the 15th straight month to conclude its November monetary policy meet, an outcome that was widely anticipated by financial markets. Wrapping up the monthly meeting, the Central Bank stuck with its forecast that economic growth would accelerate to around 3.00% over the next few years, pushing unemployment below the current 5.50%.

However, acknowledging recent weakness in retail sales, Governor Philip Lowe warned that household consumption remained "a continuing source of uncertainty.” Fierce competition has driven retailers to slash prices, particularly in supermarkets, yet overall sales barely managed to add to economic growth during the third quarter. AUDUSD has reversed from the highs of the session to currently hover around 0.7680.


Higher Energy Costs Lift Euro Zone Producer Prices

Inflation at Euro Area factory gates rose more than expected in September on higher energy and intermediate goods prices.  Data revealed by the European Union’s statistics office on Monday showed producer prices in the 19-nation currency bloc gaining 0.60% month-over-month in September to translate to a 2.90% annualized increase. Apart from topping the consensus forecasts projecting a 0.40% monthly rise, energy prices climbed 1.50% on the month and surged 4.60% year-on-year.

The pickup in producer prices could signal further upside in consumer prices over the coming months as factories pass along cost increases. Furthermore, it is a growing sign that the European Central Bank’s purchases of government bonds on the secondary market to stimulate price growth continues to help consumer inflation trend back towards just below the 2.00% threshold targeted over the medium-term. After slipping the last two sessions, EURUSD is extending losses, trending back below 1.1600.


Canada’s Ivey PMI Reaches 21-Month Peak

The pace of purchasing activity in Canada gathered momentum in October to climb to its highest point in 21-months as inventories and prices rose.  According to the Ivey Purchasing Managers Index released late on Monday, the index jumped to 63.8 last month, marking its highest reading since January of 2016 after rising from 59.6 in September.

While both the inventories and prices sub-indices advanced higher, the employment gauge fell to 52.0 in October from 59.4 in the prior month. The Ivey PMI measures the activity level of purchasing managers across Canada and is computed by the Richard Ivey School of Business. Since purchasing managers typically have the earliest access to data about their company’s performance, the Ivey PMI often serves as a leading indicator of overall economic conditions in the country. EURCAD is largely unchanged early Tuesday, with the pair trending near the 1.4750-mark.


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