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Sanguine Calm Helps Equity Rally Continue

As the holiday shortened trading week begins, there is sanguine calm that has enveloped financial markets and is driving growth-correlated assets higher.   Helping to bolster sentiment throughout the global landscape were overnight reports that China would provide assistance to Russia if required, which could be achieved through an expansion of the currency swap line that was agreed to in October of this year.   The currency swap line that was originally approved at roughly $24bn could be drawn on by Russia in an effort to shore up the Rouble, helping to stabilize Russia’s economy amid slumping oil prices and international sanctions that are affecting trade.   As a result of the talks between Russia and China, weaker Rouble shorts have been scrambling to cover their positions and stay ahead of the curve, with USDRUB dropping back below the 55 handle, almost a 6% gain for the Rouble to begin the week.

While hydrocarbons have seen some softening after the strong close on Friday, the stabilization in crude that suggests oil might have carved out a short-term bottom has eased investors’ concerns and volatility in equity markets.   We would point out that the correction in global equities amid the sharp collapse in crude prices was more a factor of heightened volatility in markets and investors searching for safety as opposed to concerns surrounding what the drop in oil meant for the global economy.   Other than oil producing countries, the breakdown in hydrocarbon prices will provide oil consuming nations with greater purchasing power, which will be a net benefit for the global economy; and now that we’re seeing some stabilization and lower volatility, this should help bolster overall market sentiment into the end of the year.   Along those same lines, confidence that oil prices would pick up was reiterated by Saudi Arabia’s oil minister over the weekend, and that economic growth and increased demand would help put a floor under sliding prices.   Though WTI has seen some selling pressure in early trade to begin the week, the front month contract is changing hands around the $57/barrel mark while Brent is finding will seller just north of $61/barrel.

The economic news stream has and will continue to be light for the Monday session, with the only notable tier-one data release to be Existing Home Sales for the US over the month of November.   Expectations are for a slight softening in the annualized reading of residential buildings sold during the previous month, with the median forecast calling for a 1% drop to 5.2M.   That said, tomorrow’s Durable Goods Orders data should help with the narrative of US economic strength amid plans for solid business investment, increasing the outside chances of a Fed rate hike sometime in Q2 2015.   There has been some position squaring and profit taking as the DXY nears the key 90 level, and although we’re likely to see robust economic numbers out of the US this week, sustained USD strength through the 90 handle could be tough to achieve giving market participants wiliness to cull profitable long USD positions into the end of the year.   Despite the relative softness in the big dollar against the majors, the Loonie has ebbed lower against its American brethren, corralled by the ask tone in crude and a lack of domestic economic data to trade from.   We expect USDCAD to trade in a fairly conservative band pivoting in the mid-1.16s before domestic GDP data tomorrow, where expectations for a modest 0.1% monthly growth rate in GDP could hamper any sustained Loonie strength before the Christmas break.

Further reading:

USD: A Narrower Focus At The Fed?; CAD: Futures Not Sold On Crude Recovery – CIBC

EUR/USD, GBP/USD, USD/JPY Technical analysis, pivot points – Dec. 22 2014

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.