Crude Oil: Weekly forecast November 19th to November 25th

Traders' Opinions

Summary:

WTI crude oil ended last week's trading near the midpoint of its weekly price range.

In terms of raw materials overall, prices for many key raw materials have fallen in recent months.

This happened because there was an increase, although certainly the lack of demand affected producers.

Crude oil will always be needed, and in the medium term once the US dollar shows the potential for a real depreciation and economic conditions begin to stabilize internationally, giving global manufacturers the opportunity to produce profitable products could lead to oil purchases energy resources.

The $72,000 support level is considered important for WTI and could become important for bullish speculators if the buying remains strong and sustains this price going forward.

China is reportedly still procuring large amounts of crude oil from Iran.

In recent weeks, Chinese economic indicators have shown more stability, which could mean the Asian giant's demand for Chinese goods could prove significant.

Global risk-off concerns appear to have been absorbed by investors for now, with signs of an awakening in risk appetite.

Optimism is expected to return among financial institutions, which could lead to speculative buying in WTI crude oil.

Technical Analysis

The speculative price range for WTI crude oil is between $72,400 and $83,100.

Looking for upside, WTI crude oil continues to look attractive.

However, Friday's rally after the low could limit day trading momentum earlier this week, with concerns that a reversal could occur on Monday or early Tuesday.

However, if WTI crude holds its value early this week, it could set the stage for speculative buying.

Traders should note that next Thursday is a major holiday in the US and trading volumes will begin to decline on Wednesday.

This means you can identify the week's most important trades early on as positions are entered.

Traders should stay on the lookout and monitor WTI oil prices at Monday's open and early Tuesday.

You should use quick trading with realistic goals.

Exploring an uptrend is an interesting one, and if the 76,000 level holds in the short term, it could mean that some uptrend is developing that targets higher levels by mid-week.

Trading Recommendations

none

Risk Warnings and Disclaimers

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ING

Commodity

Energy

Energy - Deeper OPEC+ cuts?

While the oil market managed to rally by more than 4% on Friday, taking ICE Brent back above US$80/bbl, the market still registered its fourth consecutive week of declines following signs that the market is not as tight as initially expected. However, the recent weakness has increased noise over what OPEC+ will decide to do at its meeting on 26 November. We continue to expect that Saudi Arabia and Russia will roll over their additional voluntary cuts into early 2024. However, what is less clear is whether the broader OPEC+ group will make further cuts. There were reports on Friday that the group could consider a cut of up to 1MMbbls/d. A deeper group cut combined with the Saudis and Russians rolling over their voluntary cut would be more than enough to ensure that the surplus currently expected in 1Q24 disappears.

The latest positioning data shows that speculators continue to reduce their net long in oil. Speculators sold 5,053 lots in ICE Brent over the last reporting week to leave them with a net long of 170,985 lots as of last Tuesday. It was a similar move in NYMEX WTI with speculators selling 11,257 lots, leaving them with a net long of 124,296 lots, which is the smallest position they have held since July. Speculators will likely be a little concerned about leaving too much risk on the table ahead of next weekend's OPEC+ meeting. Therefore, there is the potential for some further short-covering this week.

The latest data from Baker Hughes shows that the US oil rig count increased by 6 over the last week to 500, which is the largest increase since February. However, the rig count is still down close to 20% YTD. The slowdown in drilling activity this year suggests that US supply growth in 2024 will be much more modest than the roughly 1MMbbls/d supply growth estimated for this year.

Russia announced on Friday that it lifted its export ban on gasoline with the domestic market a lot more comfortable now. The export ban had been in place since 21 September, and it originally included diesel as well. Russia is a fairly small exporter of diesel, exporting less than 5m tonnes last year.

As for the calendar this week, WTI December futures expire today, whilst we will also get further trade data out of China, which includes flows by country. Trading volumes will also likely be thinner towards the end of the week with Thanksgiving in the US on Thursday. However, this week's big event falls over the weekend with OPEC+ set to meet in Vienna to discuss output policy. There will likely be plenty of noise around what the group may do in the lead-up to the meetings.

Metals – China's metal production rises

Recent numbers from the National Bureau of Statistics (NBS) show that China's refined copper output rose 13.3% YoY to 1.13mt in October. However, copper production fell marginally -0.4% MoM last month, after posting gains for two straight months. Among other metals, zinc output rose 7.7% YoY to 626kt, while lead production increased 8% YoY to 674kt last month.

Chilean copper miner, Antofagasta and Chinese smelter, Jinchuan have agreed on an annual treatment charge of US$80/t for next year, which is 9% lower than 2023 levels. It is also the first decline in three years. An easing in treatment charges suggests that there is an expectation that the copper concentrate market will tighten in 2024. Given the expansion in smelting capacity in China, this tightening shouldn't come as too much of a surprise.

Data from the Shanghai Futures Exchange (ShFE) shows that copper stocks decreased by another 3,820 tonnes over the last week, a second consecutive week of declines. SHFE copper stocks now stand at 31,026 tonnes as of 17 November, the lowest since the end of September 2022. Among other metals, zinc stocks increased by 7,626 tonnes to 43,204 tonnes, while lead stocks also reported inflows of 10,920 tonnes to 79,816 tonnes as of Friday.

Agriculture – Indian sugar output falls

Data from the National Federation of Cooperative Sugar Factories Ltd. shows that sugar production in India fell by 37% year-on-year to 1.28mt between 1 October to 15 November. The group said that sugar cane crushing in India decreased by 34% YoY to 16.2mt over the period, as unfavourable weather conditions decreased yields. Meanwhile, around 263 sugar mills were crushing cane as of 15 November, down from 317 mills seen last year.

Recent numbers from Ukraine's Agriculture Ministry show that the domestic grain harvest is up 38% year-on-year to 53.8mt as of 17 November. The increase was driven largely by corn, with the harvest rising 93% YoY to 23.7mt. Similarly, the soybean harvest stood at 4.8mt (+32% YoY), while the wheat harvest stood at 22.4mt (+16% YoY).

According to the latest monthly report from Western Australia Grain Association, wheat production estimates fell to 7.9mt for the 2023/24 season, down from the previous month's estimate of 8.1mt. Drier weather conditions over September and October, and lower yields at the start of the harvest are primarily responsible for lower production estimates.

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Samantha Luan

Forex

The dollar languished near an over two-month low against its major peers on Monday, struggling to make headway on the view that U.S. rates have peaked, with attention now on how soon the Federal Reserve could begin easing monetary conditions.

A key rate decision from China meanwhile took centre stage in Asia, where expectations are for Beijing to leave lending benchmark rates unchanged at a monthly fixing on Monday.

Against the dollar, the euro stood near a more than two-month high hit on Friday and last bought $1.0900, holding steady ahead of flash PMI readings in the euro zone due later this week.

"(The) euro zone PMI surveys will be watched closely for further signs the region is on the cusp of, or already in, recession," said economists at Wells Fargo in a note.

"In our view, the chances of at least a mild euro zone recession beginning in the latter part of 2023 are now becoming increasingly likely."

The dollar index, which measures the greenback against a basket of six currencies, rose 0.04 per cent to 103.95, but was struggling to break away from last week's two-month trough of 103.79.

The index had fallen nearly 2 per cent last week, its sharpest weekly decline since July, after a slew of weaker-than-expected U.S. economic data and in particular, an inflation reading that came in below estimates, have led markets to price out the risk of further rate hikes from the Fed.

Focus now turns to how soon the first rate cuts could come, with futures pricing in a 30 per cent chance that the Fed could begin lowering rates as early as next March, according to the CME FedWatch tool.

The decline in the greenback brought some reprieve for the Japanese yen, which sat on the stronger side of 150 per dollar and was last at 149.90 per dollar.

Sterling slipped 0.06 per cent to $1.24545, but was not far from a two-month high of $1.2506 hit last week.

"Market pricing for FOMC policy is likely to remain pretty steady (this week), so the dollar should have very few catalysts to move it around this week," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "If we do see risk appetite improve again, then the dollar can definitely weaken further."

Ahead of China's loan prime rate (LPR) decision later in the day, the offshore yuan firmed near a three-month high against the dollar and last stood at 7.2214 per dollar.

The Australian dollar, often used as a liquid proxy for the yuan, fell 0.17 per cent to $0.6504, while the New Zealand dollar slipped 0.04 per cent to $0.5990.

"I think the theme of a soft Chinese economic recovery will persist for a while," said Kong.

"Until we get a more meaningful recovery in the Chinese economy, I think that will be a headwind for the (yuan), Aussie and the kiwi in the near term."

Source: Reuters

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Kevin Du

Energy

Economic

Sitting in the UAE, it’s hard to visualise the terrain of Greenland, which is home to the world’s second-largest ice sheet, endless icebergs, pristine natural landscapes and many more boats than cars. Photos and videos couldn’t prepare me for what I was about to experience during my five-day climate change expedition in September to one of the northernmost parts of the world.

Along with my colleague Manal, who leads operations at Emirates Nature-WWF, and a group of vibrant, inspiring female climate leaders from around the world, I made my way to the village of Ilulissat, 250 kilometres north of the Arctic Circle, for an update on the latest status of climate change and to explore high-impact solutions with scientists, experts and the local Inuit community of Greenland.

Why go all the way to Greenland for this? Let me answer with a question: what is the one thing that Greenland and the UAE have in common? Both are experiencing climate change faster than other parts of the world.

While average global surface temperatures have risen to 1.2°C since pre-industrial times, temperatures have risen to 1.5°C in Greenland and 1.8°C in the Emirates. As the planet’s surface temperatures continue to rise, both countries will experience temperatures inching even higher, disproportionate to the global average.

Greenland’s ice sheet is melting four times faster than in 2003 and is losing 270 billion tonnes of ice mass a year, making it one of the largest contributors to rising sea levels. Scientists say that the ice sheet is close to tipping point, beyond which melting would become inevitable, regardless of global temperatures. This would trigger numerous knock-on effects such as rising sea levels and coastal inundation. It would also involve thawing permafrost releasing greenhouse gases; increasing amounts of water vapour that could evolve into destructive typhoons and cold glacial melt that would interact with warmer oceans and slow down ocean currents. A diminished ice sheet would also reduce the reflection of incoming solar energy and radiation. These are just some of the innumerable consequences that scientists in the Arctic Circle are still deciphering.

The Greenland ice sheet is a treasure trove for scientists. It has existed for more than 100,000 years – some portions have existed for even longer – there is much to learn. Scientists have been able to drill out cylinders of ice – “ice cores” – and measure the atmospheric composition of the air pockets trapped within. This data holds insights about historic temperature levels and atmospheric composition of carbon dioxide, methane and other heat-trapping gasses. Scientists have been able to corelate these to different eras such as pre-historic times, the last Ice Age and the Industrial Revolution. Most importantly, they verify that atmospheric carbon dioxide is increasing at a much faster rate than ever before.

However, although carbon emissions have increased greatly, temperatures have not caught up yet. This points to a narrow window of opportunity in which we can act to prevent irreversible change – seven years, according to climate scientists at the Intergovernmental Panel on Climate Change.

But the most shocking thing I experienced during the expedition wasn’t the data, charts or timelines – it was something else. One of the most striking things about Ilulissat is the abundance of icebergs. Everywhere we looked, we saw mountains of ice that blended into the clouds – and were quickly informed that these towers of ice were quite tiny compared to how large they used to be.

During our travels by land and boat, we found ourselves surrounded by smaller chunks of ephemeral ice that floated around, relatively briefly, before they dissolved into the sea for good. As we marvelled at the silence and immense beauty of Mother Nature, we were jarred by the realities of climate change – the crashing sound of chunks of ice calving off the glaciers and falling into the sea, time and time again. Every few minutes, we felt sound vibrations run through our nervous systems, as nature reminded us of the raw power, the sheer scale and unimaginable speed of climate change.

As the day ended, we were each left with profound thoughts about the lasting physical impact of our every choice and action. The next morning, we woke up with renewed conviction and commitment to tackle the climate-nature crisis once and for all.

A moment that I will forever cherish is our walk through Ilulissat Icefjord to visit an old settlement where the indigenous Inuit first settled 4,500 years ago. They passed down their traditions and knowledge for generations, teaching younger Inuit how to survive off the land by hunting for whales, seals and reindeer, as well as foraging for berries. The community would use sled dogs as their main mode of transportation.

I found comfort in the familiarity of tradition; it reminded me of how our Emirati ancestors taught us how to survive in the harsh desert, hunt for pearls and fully utilise the limited natural resources we had access to before industrialisation and modernisation. I also found solace in the spirit of the Greenlandic people, who have turned to entrepreneurship, renewable energy and innovation to ensure food, transport and livelihoods. They have been forced by climate change to learn how to adapt within a generation and have so much progress to show for it.

As we get closer to the critical Cop28 climate change conference in Dubai, it is of paramount importance that we – residents of the UAE – and around the world, stay focussed on achieving a credible pathway for a 1.5°C world, in line with the Paris Agreement. The journey will be challenging, but I can say with experience and confidence that collective action can shape a better, sustainable future. The journey entails several things.

First, we need to have broader awareness about the urgency of climate change. This crisis will not resolve itself. Authentic storytelling will be critical to mobilise society to act. This includes government and non-state actors such as businesses and organisations, as well as civil society, young people and local communities.

We need to see greater collaboration across sectors and industries on climate mitigation and adaptation, and especially the transition towards renewable energy. The science is clear on the pathway to net zero: we need to work together to halve emissions, triple renewable energy and double energy efficiency by 2030 to secure a 1.5°C future.

There needs to be a recognition of nature and nature-based solutions as some of our greatest allies against climate change, with the potential to absorb emissions from the atmosphere, build adaptive capacity to protect us against the impacts of climate change, and improve biodiversity and human well-being through innovative projects around food security and ecotourism. Nature has already played a pivotal role in slowing down warming by absorbing 54 per cent of human-related carbon emissions over the past 10 years.

Also necessary is a holistic approach that prioritises technology that removes carbon and methane from our atmosphere. We must also realise this is not a standalone solution – it must be part of a larger pool of solutions. Collaboration with local communities and the inherent knowledge they have of their land is also a must.

Increased willingness and action to transform our approach to food, agriculture and land use is important because it is responsible for a quarter of greenhouse gas emissions, including the highly potent methane that is fuelling near-term temperature rises.

Last and certainly not least, we need to swiftly mobilise financing for impactful investments that can lead to co-benefits for society, the environment and the economy.

Everyone has a role to play in tackling the greatest challenge to people and planet. I urge you to find your role within the system and be part of the global movement to act faster and smarter, so that we can restore nature and get ahead of climate change once and for all.

A great way to start is by looking at platforms that are readily available, such as Leaders of Change in the UAE, which provides people with the opportunity to participate in conservation field work and projects that are linked to national and global climate and nature targets.

Source: The National News

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Cohen

Political

On Monday, French police arrested eight youngsters, aged from 11 to 17, suspected of chanting slogans calling for the death of Jews in an unsavoury episode on the Paris Metro last month.

Filmed on October 31 by another passenger, the group also targeted the police, sexual minorities, and France itself, before mocking one woman brave enough to intervene. "We are Nazis and we are proud," they chanted during a tirade of hatred that lasted no less than 10 minutes, just weeks after Hamas killed about 1,200 people in southern Israel.

Since the horrific carnage of October 7, France – which has a Jewish population estimated at 500,000, Europe's biggest – has recorded more than 1,500 acts of anti-Semitism. This alarming statistic added a bleak backdrop to the marches against anti-Semitism on Sunday that brought 182,000 people on to French streets.

It was an expression of mass concern that assumed special significance because of the presence of Marine Le Pen and others from her far-right National Rally (RN) – along with at least two senior members of Eric Zemmour's even more extreme Renaissance party. It was also marked by the absence of Jean-Luc Melenchon, leader of the far-left France Unbowed, and the bulk of his supporters.

President Emmanuel Macron stayed away, too, for which he drew some criticism. He probably limited the damage by letting it be known that his "heart and thoughts" were with the marchers, even as he saw his job as decision-making in the general interest rather than joining demonstrations.

Some French political observers believe Ms Le Pen, who leads the RN group in the French parliament, is heading for power. Hers is the country's most popular party, and with the collapse of support for the conventional left and right, there is no longer the comforting reassurance that the "republican front" that has always kept it out of high office will once again hold firm when Mr. Macron completes his second and final term as President in 2027.

From being a despised, mob-like fringe that voters could be counted on to unite and defeat, RN has largely achieved Ms Le Pen's ambition of seeing it accepted as a party like any other, no longer untouchably anti-republican. Many working-class voters who previously voted for the left have switched to her, seduced by an anti-immigrant mantra and France-first, protectionist economic policies.

RN's show of solidarity with French Jews underlines a remarkable evolution for a movement founded by Ms Le Pen's father, Jean-Marie, repeatedly punished in the courts for anti-Semitic and racist statements.

RN began life with the more menacing National Front as its name, gaining favour among disgruntled French military veterans appalled that Algeria had been granted independence. Its appeal extended to those who viewed Jews with disdain. According to Sandrine Rousseau, a member of parliament for the Greens, RN is now "whitewashing itself in the face of the anti-Semitism of its birth".

Ms Le Pen's senior colleagues point out that several years have elapsed since she distanced herself from her father's ugly rhetoric (he has never repented for describing Nazi gas chambers as a mere detail of war history). It has been a slow process. Early in their estrangement, Mr. Le Pen boasted that there were no more than wafer-thin differences in their outlooks. His daughter, though, has called the Holocaust "the abomination of abominations" and pursued a relentless policy of attempting to « detoxify » her party's image, albeit without success in the eyes of political enemies.

Sometime before Mr. Macron's first, resounding victory to become President in 2017, with 66 per cent of the vote in the run-off against Ms Le Pen, her aides privately admitted that whereas perceptions of Islamophobia presented no difficulty on campaign trails, anti-Semitism was the issue that kept the party marginalised.

Even in its rehabilitated form, RN continues to be treated as an extremist movement that demonises France's Muslim population, also Europe's largest and estimated by the German data-gathering company Statista at 5.7 million.

And the stridently pro-Jewish sentiments of today still sit uncomfortably not only with RN's past but with lingering self-denial.

Jordan Bardella, who succeeded Ms Le Pen as RN president a year ago, called the party's record on anti-Semitism "perfectly irreproachable". But in the same BFMTV interview, he said did not believe Jean-Marie Le Pen was anti-Semitic, despite his brushes with the law for being just that and despite also asserting that anti-Semitism was the cause of the father-daughter split, leading to her expulsion of him from the party.

For all its indignant protestations, RN cannot shake off the far-right label. Legitimate reservations linger about the true feelings of all those within a party that has in the past found room for Holocaust deniers and admirers of Adolf Hitler.

Even so, it is a measure of Ms Le Pen's effective leadership that an important member of France's Jewish community warmly welcomed her support at a time of suffering and fear for those of his faith.

"For me, the DNA of the far right is anti-Semitism," Serge Klarsfeld, 88, who helped bring Nazi war criminals to justice, told the conservative Le Figaro newspaper. "So when I see a big party of the far right abandon anti-Semitism and negationism and move towards our republican values, naturally I rejoice."

He voiced sadness at the far-left boycott.

In France as in Britain – and beyond in the West – many socialists have concentrated their anger on Israel's violent response to October 7, and the resulting deaths of thousands of civilians. There is deep disapproval of Israeli policy and a strong conviction that Palestinians are fully entitled to their homeland.

And while most on the left resent the suspicion of anti-Semitism, the charge has been made and – viewed from the right – sticks.

Mr. Melenchon has struggled to win broad sympathy for his claims that Sunday's demonstrations united forces offering "unconditional support" to Israel in its "massacre" of Gazans.

Only about a hundred people attended his party's own rally in Paris "against anti-Semitism, all forms of racism and the extreme right". A handful of Jewish counter-demonstrators tried to disrupt the event, citing the party's refusal to categorise Hamas as a terrorist organisation.

But just as pro-Palestinian protests are joined by a few who might share Hamas's hatred of the state of Israel, there will have been plenty among those marching on Sunday who regard Israeli actions as wholly justified however many civilians perish.

On the same day that Parisian police hauled in teenagers suspected of inciting hatred against Jews on the Metro, there were commemorations of the anniversary of the ISIS attacks that left 130 dead and hundreds more wounded in Paris on November 13, 2015.

That atrocity and others fuelled anti-Muslim hostility around France; attacks against mosques and other Islamic targets also became more common. Such incidents are as abhorrent as the targeting of Jews.

But it may be a naive and forlorn hope that selective attitudes should make way for an end to all prejudice, and for all deaths in conflict to be mourned, whether caused by militant groups or nation-states.

Source: The National News

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TD Securities

Economic

U.S. – Extended Fed Pause Looking Increasingly Likely

Market sentiment was decisively in the risk-on camp this week, as a softer reading on October inflation and signs of slowing consumer spending fueled expectations of a longer Fed pause. Also providing a lift to equities was Congress acting to pass yet another short-term funding bill that avoids an immediate government shutdown by extending current levels of spending through mid-January. The S&P 500 is shaping up to end the week 2% higher – extending its winning streak to three-consecutive weeks. Longer-term yields traded lower, with the 10-year Treasury ending the week down 18 basis-points to 4.43%.

Turning to the Consumer Price Index (CPI) report, both headline and core inflation came in below market expectations. Falling energy and goods prices, a further easing on housing costs and some deceleration in the ‘supercore' measure all contributed to last month's softer print. On a twelve-month basis, core inflation is down 2.6 percentage points from last year's high but, at 4%, remains well above the Fed's 2% inflation target (Chart 1). As noted in our commentary, the challenge for the Fed going forward is that much of the low hanging fruit on the dis-inflation front has now been picked. With supply-chain issues largely resolved, it is unlikely that falling goods prices will continue to exert as much of a drag on inflation going forward. Ultimately, this means a more pronounced slowing in consumer spending will be required to sustain continued downward pressure on inflation.

The Weekly Bottom Line: Extended Fed Pause Looking Increasingly Likely_1

Retail sales data out this week showed that spending activity moderated in October. Although some of the weakness was attributed to a pullback in vehicle sales (possibly impacted by the UAW strike), the less volatile components still showed a meaningful deceleration in spending relative to prior months (Chart 2). Moreover, higher frequency credit card spend data reported through the first week of November has shown that spending activity has continued to moderate into the holiday shopping season.

The Weekly Bottom Line: Extended Fed Pause Looking Increasingly Likely_2

At this point, the tailwinds for the consumer seem to be fading. Over two-thirds of the excess savings accumulated during the pandemic have now been exhausted, with most of the remaining savings likely residing with higher income households who tend to have a lower marginal propensity to consume. This is happening at a time when 27 million borrowers have started to make regular student loan repayments amidst a backdrop of deteriorating consumer sentiment and expectations of a cooling labor market.

To that end, recent readings on initial jobless claims have already turned higher over the past month, as have continued claims – recently touching a near two-year high. This suggests that not only are more workers losing their jobs but it's also becoming a bit harder to find another. Ultimately, the labor market remains very tight by historical standards, but the recent drift higher in claims data suggests underlying conditions are easing on the margin. Although the Fed will need to see further evidence of cooling in the months ahead to rule out another rate hike next year, the recent data flow favors the FOMC holding rates steady in December.

Canada – Supply, Supply, Supply

Canadian bond yields were down this week. However, as is often the case, developments south of the border were the driver. Markets seemed to breathe a collective sigh of relief after a softer-than-expected U.S. CPI report offered some hope that the Federal Reserve wouldn't be taking their policy rate higher in the near-term. This prospect also supported a rally in Canadian equities, even as oil prices continued to drop on demand concerns and a larger-than-expected inventory build. It also helped prop up the Canadian dollar, although at around 0.73 U.S. cents, the loonie continues to fly low compared to its U.S. counterpart.

Next week features the release of the Canadian inflation report for October. U.S. all-items inflation trends have historically been a good guide for overall Canadian CPI, so the good showing stateside this week bodes well for the Canadian print. Specifically, markets expect all-items inflation to have cooled to 3.2% year-on-year in October, a marked deceleration from the heated pace observed during much of the summer. As in the U.S., energy prices should lead the inflation deceleration. However, policymakers will be keying in on core inflation, which is also expected to show some modest cooling in year-on-year terms. Notably, U.S. core inflation (i.e., ex-food and energy) eased a touch in October although the correlation between it and the equivalent Canadian measure isn't nearly as tight as it is for overall inflation.

The fall federal fiscal update is also on tap for next week, and the government has telegraphed its intentions. As Minister Freeland noted in a speech this week, the focus will be on housing "supply, supply, supply", amid Canada's affordability crisis. Builders are certainly doing their part to respond to this challenge, with this week's report on housing starts showing them rising to a highly elevated level of 275k units, which is not too far off the record pace hit in early 2021. On a six-month average basis, starts are sitting at a very healthy 253k units (Chart 1), with the largest contributions coming from condos and purpose-built rental construction. While these are good trends indeed, the time it takes to complete a housing project in Canada is on the rise, and even these lofty levels of homebuilding may not be enough to prevent a housing shortage from accumulating given very robust population growth. The Weekly Bottom Line: Extended Fed Pause Looking Increasingly Likely_3

The Weekly Bottom Line: Extended Fed Pause Looking Increasingly Likely_3

From a near-term residential investment and GDP growth perspective, last month's modest gain in housing starts should provide some offset to the 5% month-on-month decline in October's Canadian home sales. As expected, average and benchmark home prices pulled back last month, as did new listings. Arguably the most eye-catching aspect of the report was the decline in Ontario's sales-to-new listings ratio, which hit its lowest level since the Global Financial Crisis (Chart 2). This is a strong signal that more home price declines may be on the way. The Weekly Bottom Line: Extended Fed Pause Looking Increasingly Likely_4

The Weekly Bottom Line: Extended Fed Pause Looking Increasingly Likely_4

To stay updated on all economic events of today, please check out our Economic calendar

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Forex

Jobs and inflation data hurt the dollar

The US dollar suffered a major blow this week after the US CPI data revealed that inflation cooled by more than anticipated in October, adding credence to investors' view that the end credits of the Fed's tightening crusade have already rolled, despite Chair Powell and several of his colleagues pushing back against such expectations recently.

This was the second hit in less than two weeks for the US dollar, with the first one coming after the disappointing jobs report for the same month. Bearing in mind that the Fed is linking its monetary policy decisions to both inflation and the labor market, easing conditions on both fronts prompted market participants to price out any chance for another hike this year and to pencil in around 100bps worth of rate reductions for next year.

Fed to cut in 2024; but by how much?

Nonetheless, there is no evidence yet supporting so many basis points worth of cuts for next year. Yes, the US economy is expected to have slowed in Q4, with the Atlanta Fed GDPNow and the New York Fed Nowcast models projecting growth rates of 2.2% and 2.5% respectively, but with interest rates at such high levels and the economy growing at the astounding pace of 4.9% in Q3, such a slowdown appears quite normal.

On the other hand, the Fed could start cutting rates and monetary policy would still stay tight, pushing inflation in the right direction. So, should data continue to suggest that inflation is drifting south faster than anticipated, then the Fed may be tempted to start cutting sooner than it currently anticipates, in order to avoid a more severe than forecast economic slowdown.

According to its September dot plot, the Committee is projecting one more hike and expects interest rates to end 2024 within the 5.00-5.25% range. In other words, it anticipates only 50bps worth cuts for next year, which is a decent deviation from what the market is currently pricing in. Therefore, the big question moving forward is: Who is right? The market or the Fed? Has Dollar Rally Run Its Course?_2

US economy seen slowing, but 100bps cuts not justified

The Fed's own economic forecasts suggest that the economy could slow to 1.5% growth in 2024 and then reaccelerate to 1.8% in 2025, with inflation easing to 2.2% by the end of 2025 and hitting the 2% objective in 2025. Indeed, such projections do not justify 100bps worth of rate cuts and should incoming data continue to point to a US economy that is faring better than its major peers, investors may be eventually convinced to lift their implied path. Even if new rate hike bets do not resurface, market participants could scale back a decent amount of basis points worth of cuts, which could prove positive for long-dated Treasury yields, and thereby help the dollar rebound.

Although traders currently appear willing to sell the dollar more aggressively on anything confirming the 'no more hikes' narrative than on anything corroborating the Fed's 'higher for longer' mantra, there is nothing suggesting that a bearish reversal is imminent. The Eurozone seems to be headed for its own recession, which could eventually prompt the ECB to start cutting its own rates before the Fed does. The UK economy is also in a bad shape and following the larger-than-expected slowdown in UK inflation during October and disappointing growth-related data, investors may be tempted to continue bringing forward their BoE cut bets. This could happen despite Governor Bailey arguing that it is too early to be thinking about rate cuts. Such thinking by investors is likely to leave the euro and the pound in a vulnerable position for a while longer. Has Dollar Rally Run Its Course?_3

Dollar could struggle against aussie, kiwi, and yen

Currencies that have more chances in outperforming the dollar may be the risk-linked aussie and kiwi, as expectations of several rate cuts by the Fed have already been translated to increasing risk appetite, as made evident by the latest rally in Wall Street. What's more, with investors not even pricing in a full 25bps cut by the RBA in 2024, the aussie could perform even better. That said, this may be a story for next year, when the Fed begins to cut rates and the slide in short-dated Treasury yields accelerates. The yen could also perform better than it did this year if the BoJ abandons its yield curve control (YCC) policy, although improving risk appetite is usually not a plus for this currency. Has Dollar Rally Run Its Course?_4