AWARDS
ING FX Daily
Brent crude's failure to return to $100 a barrel remains somewhat puzzling. The longer the supply disruption lasts, the more vulnerable the oil market should be and, in theory, subject to greater upward volatility if hopes for a de-escalation fail to materialize. Our team of commodity experts also notes that the total decline in inventories over the past month and a half has been 32 million barrels, and even if flows through the Strait of Hormuz were to resume today, inventories are likely to continue declining in the third quarter, leaving upside potential for prices.
To maintain oil prices at these levels, strong optimism regarding a peace agreement is therefore necessary. This prevents the dollar from strengthening further in an environment that is otherwise significantly more favorable to the greenback than a month ago, thanks to the Fed's tightening monetary policies.
The May US employment report, due out today, will test interest rate expectations. We expect a slightly higher-than-expected jobless figure (100,000 versus 88,000) and an unchanged unemployment rate of 4.3%. Markets are waiting for the catalyst that will allow them to fully price in a Fed rate hike this year (currently at 17 basis points): this could be a positive surprise today. A close-to-expected figure would likely only consolidate recent tightening and provide a more solid base for the dollar as we await news from the Gulf.
The EUR/USD exchange rate fluctuated yesterday, but remains stuck in a range between 1.160 and 1.1650, a range it has held for much of the past two weeks. Significantly, the pair is trading about 1.5% lower than when oil traded at these levels in April.
The partial divergence with oil prices remains clear evidence that short-term interest rate differentials are once again becoming a determining factor for the EUR/USD, a point confirmed by the beta in our short-term fair value model.
We continue to view next Thursday's European Central Bank meeting as a moderately positive catalyst for the euro, with a forecast 25 basis point hike. Until then, risks remain tilted toward a downside break of 1.160, in the absence of concrete progress in the US-Iran negotiations.
Today, Canada releases May labor market data, simultaneously with the US. The overall picture was less positive. April data were disappointing, with unemployment reaching 6.9% and a net loss of 17,700 jobs.
Consensus forecasts a stabilization today: 6.9% and 10,000 more jobs. But unless unemployment declines again, the labor market's contribution to the Bank of Canada's policy stance will remain accommodative.
