U.S. shale production is filling up the gap

1 February, 2017

Bank of Japan stood pat on the meeting leaving the short-term and long-term policy rates unchanged at -0.1% and 0.0% respectively. BoJ head Kuroda is yet to clarify the further steps on “pumping” money into the Japanese economy at the press conference aimed towards stimulating the consumer spending and inflation, as well as to combating the recession. Targeting the profit curve of sovereign bonds did not yield tangible results, being an equilibrium between demand and supply long-term bond yields to reflect future inflation pace priced in by the market. The Japanese GDP and inflation for the last three months showed growth near a zero in the annual terms. However, growth can be largely referred to the upturn in fuels prices, while the underlying trend of the Japanese economy remains very weak. This was noted in the previous Draghi ECB press conference. USD/JPY pair after a quick hike in the area of 114.00 retreated to lower bound of 113.20 level due to a sharp weakening of US dollar because Trump is keeping the bullish mood in anticipation of Kuroda comments.

Meanwhile, Trump’s determination on the issue of tightening immigration controls led to another round of destabilising the political situation in the country. Acting general attorney Sally Yates was shifted from the position after she boycotted Trump’s instructions along with other officials of the Ministry of Justice. The situation has crossed rally attempts of the US currency before the FED meeting, as it is expected that the Central Bank will be compelled to exercise caution in decisions amid unpredictable Trump “whims”. Dollar index tested the bullish support at 100.20 and then tried to get out of selloff, rising to 100.35 (-0.08%). Lower bound of DXY trades seen recently is likely to remain unwavering till Yellen clears up the FED’s stance. Yields of the long-term US treasuries is rising to the peaks of the 2014 price in heightened pace of inflation, despite all political risks that leave a solid chance to see hawkish FED decisions in the upcoming meeting. Amid those assumptions buying the greenback in the range of 100.20-100.50 may be quite reasonable.

Oil drop extended for a second day of the week as OPEC production cuts had mixed market impact while shale producers in the US are continuing to increase production filling up free space on the supply side left by OPEC. The Oil rig count keeps growing Baker Hughes report showed while investors are bracing for the API and EIA report on crude oil inventories and refinery operational capacities in the US. The prospects of growth in the Oil market is unclear.

Precious metals appreciated in price amid political turbulence in the US. Gold futures added half a percent for the second day, trading near $1,200 per troy ounce, Silver posted minor gains of 0.1%.

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