WTI Steadies Near $69.00 Amid Geopolitical Risks, Rise In US Crude Stock

We have revised our view of the most likely scenario for the path of the RBA’s cash rate, pushing out the start date of the rate-cutting cycle from February to May. Similar to the pattern in some peer economies, we expect the initial moves to be somewhat front-loaded, with consecutive cuts in late May and early July. This is also a change from our previous expectation of a moderate pace of decline of one cut per quarter. We continue to expect the terminal rate to be 3.35%, to be reached by year-end 2025.

As always, our view on the cash rate is predicated on things turning out broadly as we expect, which can differ from the RBA’s own view. An earlier start in February or March is still possible, but it is no longer more likely than a May start date. A later start date is also a risk scenario, if inflation does not decline as the RBA is currently forecasting, let alone our own marginally more dovish expectation. That said, the longer the RBA Board waits, the faster they will need to move thereafter, as it would then be more likely that they have hesitated too long.

The minutes of the RBA Board meetings often provide important colour about the Board’s deliberations, going beyond what is already covered in communications immediately after the meeting. While the post-meeting communication was still broadly in line with our earlier expectation, subsequent public appearances and the minutes now suggest that the balance of probabilities has shifted. The recent sharp increase in consumer sentiment – though still to a below-average level – and ongoing resilience in the labour market will have also tilted the balance of probabilities to waiting longer.

The minutes note that ‘staff forecasts were consistent with the Board’s strategy of aiming to return inflation to target within a reasonable timeframe while preserving as many of the gains in the labour market as possible’. This is important confirmation that, if things turn out as the RBA expects, it will eventually become time to normalise policy. Policy is restrictive, and if it were to stay where it is for an extended period, inflation would undershoot the target sooner or later. The path for interest rates assumed in the forecasts is a technical assumption, and small changes in timing are not that consequential. Even so, recent RBA communication does suggest that they are more comfortable with the later date embedded in recent market pricing than the late-2023 timing implied by market pricing not so long ago.

Market participants and other observers have also pointed to the language in the latest meeting Minutes that the Board ‘would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable’. This has been interpreted as saying that the RBA needs to see at least two more quarterly CPI (and more importantly, trimmed mean) outcomes from here before being confident of their forecasts. This is almost certainly how the Board and staff are thinking about the outlook. It suggests that they will wait for longer than we previously believed.

We are mindful, though, that things can pivot quite quickly, and that the RBA’s view of the economy looks somewhat more hawkish than we think is warranted.

Recall that as late as February 2022, the RBA was not signalling that it expected to increase the cash rate anytime soon. At the time, then-Governor Lowe was reported as saying, “I think these uncertainties are not going to be resolved quickly. Another couple of CPI’s would be good to see.” Yet it raised rates in May of that year. When the facts change – it became apparent that wages growth had actually picked up at last – you have to change your mind.

Recall also that the RBNZ pivoted quickly this year, too. Only a couple of months before the first cut in August, it was looking like it was going to stay on hold for all of 2024.

The language of the minutes emphasised that trimmed mean inflation was high and declining more gradually than the rebates-affected headline CPI. No mention was made that their near-term forecast for trimmed mean inflation over the year to December 2024 was shaved down slightly to 3.4% from 3.5% in the August round, as was the end-2025 forecast. This was characterised as being ‘little changed’. It does raise the question of what constitutes a ‘good quarter’ for inflation. Indeed, our own near-term view is a touch lower still. And if the December quarter outcome turns out to be a little lower than even our own view, it would take the annual rate to 3.2%, just barely above target. In that scenario, one would have to start wondering exactly what they are waiting for.

As the minutes highlighted, the RBA’s forecasts hang crucially on a relatively bullish view of the potential for consumption growth to pick up as inflation declines and real incomes recover. Our own view incorporates a more modest recovery, noting the relatively subdued response so far to the income boost from the Stage 3 tax cuts. And while public demand (and non-market employment) is sustaining some demand growth for now, this will not last forever. When the outsized growth in this area does eventually fade, it will take time for other sectors to recover in compensation. Australia could end up with an extended period of lacklustre growth.

Another area where the RBA could end up revising its view is on the labour market. Employment growth has been unexpectedly robust. It is important to remember that, with labour force participation rates trending up over many decades, employment has to run very hard to avoid an increase in the unemployment rate. While the unemployment rate has levelled out recently, the underlying trend has been an upward drift for precisely this reason. If employment growth slowed even moderately, things could unravel quite quickly.

Related to this, RBA has (correctly) avoided being too focused on a single number in assessing full employment. But in doing so, it has down-weighted the fact that wages growth has already turned down. Its assessment of the level of full employment could be too hawkish as a result. As we noted last week, the RBA already had to downgrade its wages growth forecasts in the November round. It will need to do so again following the September quarter WPI result.

Taking all these factors together, we assess the risks around our revised view of the rates outlook as two-sided.

(Nov 21): Bitcoin hit US$95,000 (RM425,030) for the first time as the digital-asset sector moves to cement its influence with Donald Trump by pushing for a new White House post dedicated to cryptocurrency policy.

Trump’s team is holding discussions about whether to create such a role and the industry is pitching for the position to have direct access to the president-elect, who is now one of crypto’s biggest cheerleaders.

The talks are the latest US boost for digital-asset market sentiment, alongside bitcoin accumulator MicroStrategy Inc’s plans to accelerate purchases of the token and the debut of options on the nation’s bitcoin exchange-traded funds.

The largest digital asset rose more than 2% in the US on Wednesday and extended the gain early in Asia on Thursday to a record high of US$95,004. The crypto market as a whole consolidated gains after a more than US$800 billion jump since Trump’s election victory on Nov 5, based on data from CoinGecko.

Speculators are increasingly focused on whether Bitcoin will make a further leap to US$100,000. Advocates of its claimed role as a modern-day store of value cherish the six-figure level as a rebuttal of skeptics who see little utility in crypto and decry its links to money laundering and criminal activity.

“Buyers are strangling the sellers,” said IG Australia Pty Market Analyst Tony Sycamore. “While I’m not sure it’s all going to be smooth sailing as it edges closer to the US$100,000 mark, the demand appears to be insatiable.”

MicroStrategy, the largest publicly traded corporate holder of bitcoin, on Wednesday announced an almost 50% increase in planned sales of convertible senior notes, to US$2.6 billion, to fund purchases of the token.

The once obscure software maker now bills itself as a bitcoin treasury company and has a roughly US$31 billion stockpile of the digital asset.

Trump has vowed to create a supportive US regulatory framework for digital assets and set up a strategic bitcoin stockpile. The timeline for implementation of his promises and the feasibility of the bitcoin reserve remain uncertain. The president-elect used to be a crypto skeptic but changed tack after digital-asset firms spent heavily during election campaigning to promote their interests.

Source: Theedgemarkets

Energy – Natural gas proves to be more sensitive to geopolitical risks

Oil prices edged lower yesterday despite growing geopolitical risks related to Russia and Ukraine. Having fired a US made missile into Russia earlier in the week, there are reports that Ukraine has now fired British made missiles into Russia. For oil, the risk is if Ukraine targets Russian energy infrastructure, while the other risk is uncertainty over how Russia responds to these attacks. However, as mentioned earlier in the week, Iran’s pledge to stop stockpiling uranium does counter some of the geopolitical risk, with it potentially reducing some of the supply risks related to Iran ahead of President-elect Trump entering office.

EIA weekly data yesterday showed that US commercial crude oil inventories increased by 545k barrels over the last week with stronger crude oil imports (+1.18m b/d WoW) almost offset by stronger crude exports (+938k b/d WoW). For refined products, gasoline stocks increased by 2.05m barrels, while distillate stocks fell by 114k barrels. The gasoline build came about despite refiners reducing utilisation rates by 1.2pp over the week. Lower refinery activity was more than offset by weaker implied demand. Gasoline demand fell by 964k b/d WoW.

European natural gas has been unable to escape the rising tension between Russia and Ukraine. TTF settled almost 2.5% higher yesterday on the back of this growing geopolitical risk, while the market is also keeping a close eye on Russian pipeline flows to Europe after Gazprom halted supplies to OMV. However, up until now Russian pipeline flows via Ukraine remain stable. Meanwhile, European gas storage has fallen below 90% and is also now just below the 5-year average of 91% for this time of year. The narrowing that we have seen between Asian spot LNG and TTF should mean that Europe starts to pull in more LNG as we move deeper into the winter months.

Investment funds remain bullish towards the European gas market with them increasing their net long by a little more than 47TWh over the last reporting week to almost 273TWh, which is a record high. With storage not as high as initially expected going into the winter and a number of supply risks, speculators continue to favour gas from the long side.

Market Picture

The cryptocurrency market cap is up 0.3% in 24 hours to $ 3.09 trillion. This slight increase masks an impressive altcoin pullback that failed to cap the 1% rise in BTC. However, sentiment indicators remain in extreme greed territory. Solana is down 3% overnight and around 6% from Tuesday’s high. Litecoin has pulled back 14% from Saturday’s high and is a few steps away from $100.

Bitcoin climbed close to $94K on Tuesday night, updating all-time highs. Unlike last week’s attack, the new highs were not followed by stop orders and margin calls from shorts. Instead, they moved into the $100K-plus area.

Like Litecoin, Ethereum is becoming a boring story. The rally in early November stopped just short of an overbought level, with profit taking at 61.8% of the initial momentum—significantly deeper than Bitcoin and the broader crypto market. Such an adherence to classic technical analysis may be convenient for traders, but it is hardly to the liking of enthusiasts, who have probably moved on to other altcoins.

News Background

In another recalculation, the difficulty of mining Bitcoin exceeded 102T for the first time in history. The average hash rate for the two-week calculation period rose to 755.3 EH/s.

According to JPMorgan, the hash price, a measure of Bitcoin mining profitability, rose 29% in the first half of November. The rally in BTC ahead of the hash rate increase and the increase in transaction fees as a percentage of block reward contributed to the significant improvement in mining economics.

MicroStrategy plans to issue a $1.75 billion five-year bond to be used for BTC acquisitions and general corporate purposes. The company’s reserves have reached 331,200 BTCs, on which it has spent ~$16.5 billion at an average purchase price of $49,874 per coin.

QCP Capital believes the ‘real altcoin season’ will begin after the bitcoin dominance index falls to 58% vs 59.4% now. Before that, by the end of the year, BTC could break through the psychologically important $100K mark.

According to the Financial Times, the Donald Trump-linked Trump Media and Technology Group (DJT) is in the advanced stages of a deal to buy struggling platform Bakkt.

UK Inflation Challenge

The UK continues its battle with inflation, and more importantly services inflation which ticked up slightly from September with a print of 5% vs the prior month’s 4.9%. The increase in headline inflation might also be a concern now as the annual inflation rate rose to 2.3% in October 2024, the highest in six months, compared to 1.7% in September.

Markets were expecting an uptick in headline inflation to around 2.2% while the MoM inflation number came in at 0.6% above the estimated 0.5% as well. The concern however remains with the service inflation number which is keeping headline inflation elevated.

Looking more closely at the data and a lot of the stickiness in the October number comes from categories that the Bank considers less important or less likely to show lasting inflation. This would include things like rent, airfares and package holidays which could in part explain the uptick in services inflation.

A good example of this is when looking at the core services inflation which strips out the data of rent and airfare and we have an entirely different narrative. Given there is no single definition for this, however it has been aptly broken down by ING Think which showed the ‘core services number’ had actually dropped from 4.8% to 4.5% in October.

Source: ING Think

This does not change a thing for the BoE when it comes to the upcoming December policy meeting. I still expect a 25bs cut following the recently released GDP numbers from the UK. Growth is beginning to turn sour, much like the European Union. This is something the BoE would like to avoid and in my opinion may factor heavily at the December meeting.

Based on probabilities, market participants are now pricing in around an 85% chance of a hold at the December 19 meeting with a possible rate cut in February given a 50% chance. This should in theory lend some support to the GBP as the US is expected to cut in December and the Bank of Japan is likely to continue hiking rates in 2025. Will such a move and a GBP recovery come to fruition?

Technical Analysis

GBP/USD

From a technical standpoint, GBP/USD rose in the early part of the week but failed to hold onto any material gains. The weakness in the US Dollar Index did not yield any significant gains for the GBP and with the DXY looking at a recovery today, Cable may face further downside pressure.

At present the key level around the 1.2680 handle is proving a tough nut to crack with UK inflation data helping the GBP/USD to break above this level but failing to find acceptance. If a daily candle close above this handle occurs, bulls may be emboldened which could push cable higher.

A move above the 1.2680 handle may face resistance at 1.2750 and 1.28200 (which is where the 200-day MA rests). The next key hurdle for bulls will be the 1.3000 psychological level which may prove to be a hurdle too far.

Looking at the potential for a break to the downside and the most recent swing low at 1.2600 will be the first area of support before the 1.2500 and 1.2450 handles come into focus.

The driving force behind any move is likely to come from the US Dollar Index (DXY) and its performance in the coming days. Further US Dollar strength could facilitate a retest of the 1.2500 handle.

GBP/USD Daily Chart, November 20, 2024

Source: TradingView.com (click to enlarge)

Support

1.2600

1.2500

1.2450

Resistance

1.2680

1.2750

1.2820

GBP/JPY

GBP/JPY has been inching its way lower since topping out just shy of the psychological 200.00 handle. A pullback helped yesterday by renewed safe haven flow also helped GBP/JPY push further away from the 200.00 handle.

Looking at the technicals and we have some mixed signals. We have a death cross formation as the 100-day MA crossed below the 200-day MA hinting at downside momentum. The candlesticks on the other hand show a sharp rejection following the brief stint below the MAs yesterday with the daily candle finishing as a hammer candlestick hinting at further upside.

The mixed signals do not make it easier, however when combining this with the fundamentals, further upside seems more likely in the short-term. The question is will the 200.00 handle prove a step too far for bulls?

A move higher from current prices for GBP/JPY could face resistance at 198 and 199.30 respectively.

A move lower will first require a daily candlestick close below the two MAs resting around the 194.30-194.60 range. A break of this zone could push GBP/JPY toward the 192.50 and 190.00 handles respectively.

GBP/JPY Daily Chart, November 20, 2024

Source: TradingView.com (click to enlarge)

Support

194.30 (200-day MA)

192.50

190.00

Resistance

198.00

199.30

200.00

Source: ACTIONFOREX