RISK-OFF Start After Weekend Attacks on Saudi Arabia Oil Plants

Summary: A drone attack on Saudi Arabia massive oil processing facility over the weekend ignited a risk-off stance in early Sydney today. The Saudi stock market fell by over 2% yesterday as the country battled the effects of attacks on the massive Abqaiq oil processing facility, the heart of its oil production. While fires from the attack were contained within hours, reports suggest that half of the Saudi Arabia’s oil production was halted. Yemen’s Houthi rebels, a proxy for Iran, has been blamed for the attacks. Brent Crude Oil futures skyrocketed as high as 13% to $68.00 from Friday’s $59.60. The Dollar fell 0.35% against the Yen to 107.70 from its 108.10 close in New York. Oil sensitive Canadian Loonie climbed 0.4 % against the Dollar to 1.3235 (1.3285 NY close). The Euro was little changed at 1.1070 from 1.1077 (NY close) and 1.1065 Friday morning. The British Pound soared 1.31% on Friday to 1.2504 before easing in early Sydney to 1.2495. A report in the UK Times that Britain and the EU can agree to a deal to replace the Irish backstop, the main impediment in talks between London and Brussels, sent Sterling soaring to 1.2506 from 1.2335 Friday morning. UK PM Boris Johnson, ahead of his first face-to-face meeting with Chief EU negotiator, Michel Barnier, was confident that he could strike a deal with EU within weeks.

BRENT CRUDE OIL Price Chart - 16 SEPT 2019
BRENT CRUDE OIL Price Chart – 16 SEPT 2019

Stock futures dropped with the DOW down 0.5% to 27,070 (27,205 Friday). The S&P 500 slipped 0.55% to 2,989 from 3,005. On Friday, global bond yields jumped with the US benchmark 10-year rate up to 1.90%, August 2 highs from 1.77% Friday. On Friday, an avalanche of US government bonds sold saw a lukewarm reception, boosting yields.
US Retail Sales beat forecasts, rising 0.4% against 0.2%. US Core Retail Sales dipped to 0.00% against median expectations of 0.1%.

  • EUR/USD – The Euro rallied on Friday after the ECB rate reduction to finish 0.11% at 1.1077 in New York. Germany’s 10-year Bund yield was up 7 basis points to -0.45%. Interest rate traders saw the ECB’s stimulus adding moves as it’s last for an indefinite time.
  • USD/JPY – The risk-off stance in early Sydney saw the safe-haven Yen bought against the Greenback. USD/JPY dipped to 107.46 in thin early Sydney trade before settling at its current 107.77. On Friday the Dollar finished at 108.10 Yen, its highest finish since August 2. Japan’s 10-year JGB yield was up 5 basis points to -0.17%.
  • GBP/USD – Sterling rocketed to finish at 1.2505, up 1.31% (1.2335 Friday) after the UK Times report suggested a deal on the Irish backstop between London and Brussels could happen. Sterling shorts continued to cover as they realise that Boris Johnson’s chances of delivering a no-deal Brexit can’t happen. GBP/USD dipped to 1.2493 in early Sydney.

On the Lookout: The attacks on Saudi Arabia’s oil industry over the weekend saw a risk-off start to the week. The kingdom’s oil production was cut in half following the drone attacks. Geopolitical risk premium will weigh on markets ahead of the Federal Reserve’s Interest rate policy meeting (early Thursday morning Sydney). The Fed is poised to shave another 25 basis points off interest rates to support the slowing economy with further cuts in the coming months.
Japanese markets are closed today in observance of its Respect for the Aged Day.
Today’s data sees China’s trifecta of primary reports with Industrial Production, Retail Sales and Fixed Asset Investment. China will also report its Unemployment Rate. The US Empire State Manufacturing Index (August) rounds up the day’s reports.

Trading Perspective: Ahead of this week’s Federal Reserve meeting, the Dollar will remain under pressure overall. Geopolitical tensions will favour the safe-haven currencies while firmer oil prices underpin oil resources currencies (Canadian Dollar and Skandinavian currencies). We take a look at the market’s current positioning in tomorrow’s report particularly after a strong upmove in the British Pound. The Dollar Index (USD/DXY) dropped 0.46% to 97.858 on Friday from 98.372. Further downside corrective moves in the Greenback this week are likely, with the EUR/USD pair leading.

  1. EUR/USD – The shared currency lifted to an overnight high at 1.1110 before settling at 1.1077 in New York. The ECB is seen as done with its stimulus efforts for the time being after Thursday’s interest rate cut. EUR/USD has immediate resistance at 1.1110 followed by 1.1140. Immediate support can be found at 1.1060 (overnight low 1.10555). The next support level comes in at 1.1030. With no major Euro area data reports scheduled today, look to trade a likely range of 1.1060-1.1110.
  1. USD/JPY – The Dollar slumped against to Yen to a low this morning of 107.46 as Sydney opened in thin trading conditions. USD/JPY closed at 108.10 in New York on Friday, pretty much unchanged from 108.11. The climb in the US 10-year yield was due to a poor bond auction where there was a deluge of supply. Japan’s 10-year JGB was also up, but to a lesser extent than its US rival. USD/JPY should have seen a short-term top with 108.20/30 as strong resistance. Immediate support lies at 107.50 and a break of this support should see 107.10. Look to sell rallies with a likely range of 107.40-108.10.
  2. GBP/USD – The British currency rocketed to an overnight and 26 July high at 1.2527 before easing to settle at 1.2495 in early Sydney. Sterling saw a low at 1.2475 this morning which is immediate support. The next support level lies at 1.2440 and 1.2380. The British currency has seen speculative shorts run for cover in the past week from a low of 1.2280. Despite renewed optimism with a Brexit deal coming from the British press, much uncertainty still exists under current PM Boris Johnson. Look to sell rallies with a likely range today of 1.2400-1.2500.

Have a good week ahead all, happy trading