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Oil Price Outlook: Brent, SEK, NOK Eye Trade Talks, US CPI

Oil Price Outlook: Brent, SEK, NOK Eye Trade Talks, US CPI

2019-11-11 04:00:00
Dimitri Zabelin, Analyst
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Swedish Krona, Norwegian Krone, Crude Oil Prices, Trade War– TALKING POINTS

  • Crude oil prices, SEK and NOK could rise on Trump trade war comments
  • US CPI, retail sales may magnify market optimism, cool Fed rate cut bets
  • Swedish Krona, Norwegian Krone could reverse gains on local CPI data

Learn how to use political-risk analysis in your trading strategy!

Crude oil prices, the Norwegian Krone and Swedish Krona may all rise if US President Donald Trump’s speech on trade policy amplifies market buoyancy and leads capital to flow into cycle-sensitive assets. NOK, SEK and Brent may also get an additional boost if US CPI and retail sales data show improvement in the world’s largest economy. However, local data out of the EU, Sweden and Norway could reverse some of NOK and SEK’s gains.

US CPI, Retail Sales: How Will it Impact Fed Policy?

As noted in my US Dollar outlook, CPI data is hovering around 1.7 percent, almost half a percent below the Fed’s two percent inflation target. A weaker reading in price growth could bolster the case for the Fed to be more inclined in the future to cut rates on the basis that a core tenant of its mandate is not being satisfied. A growth in the expectation for additional liquidity provisions could boost equities, NOK, SEK and Brent.

Chart showing US CPI

Advanced retail sales data for October is anticipated to show a recovery of a 0.2 percent growth rate after the prior reading showed an unexpected contraction of 0.3 percent. A softer print could inspire hope for more accommodative policy in the future in order to boost economic growth. Conversely, a stronger reading may cool rate cut bets and markets may receive it well if they interpret it as a sign that fundamentals are improving.

This kind of response would mirror something very similar we saw in 2018 where the Fed raises rates four times, but stock markets and crude oil prices continued to rise. This was because the underlying fundamentals were strong enough to endure tightened credit conditions. But a year into the trade war and rising geopolitical threats, markets were less receptive to rate hikes and began to yearn for liquidity as growth slowed.

As a result, for a large portion of this year, when the Fed signaled that it was not as dovish as markets were expecting, stock markets and cycle-sensitive assets – like NOK, SEK and crude oil – all fell. But now, the perception of improving fundamentals and ethereal hope of a US-China trade resolution may have revived that same market response we saw in 2018 where good data improved market sentiment – not impaired it.

Trade War: Why Trump’s Speech is Important

On Tuesday, US President Donald Trump will be delivering a speech on trade policy at the Economic Club of New York. The highly-anticipated event will cover US-China economic relations and insight on “phase 1” of their multi-sequential trade accord. Trade relations with the EU may also be mentioned especially after Washington recently decided not to impose auto tariffs – at least for now.

Eurozone Economy: Why Poor Data Hurts SEK and NOK

In the Eurozone, traders will be eagerly waiting to see the publication of the preliminary 3Q GDP dara and final readings for price growth in October. As the destination for well over 70 percent of Norway’s and Sweden’s cross-border sales, the export-driven economies will be closely watching to see if demand from their biggest trading partner is growing or shrinking.

Swedish Krona Outlook: Crucial CPI Data in Focus

Despite potential optimism from trade talks and their follow-on effect of lifting sentiment-linked assets like crude oil prices, SEK and NOK, the Krona may retrace some of its gains if CPI data disappoints. On November 12, the Prospera Swedish Inflation Expectations Survey will be published with a cascade of price growth data to be released the following day.

As Eurozone economic growth continues to slow and regional geopolitical risks – e.g. debt instability in Italy and Brexit – rise, Swedish policymakers have noticed the chilling effect it has had on local economic data. Business and consumer confidence have waned, and potential upside inflationary pressure is persistently doubted by traders which may explain why the Swedish Krona is worst-performing G10 currency of 2019.

Traders are doubting the central bank’s ability to raise borrowing costs without further undermining economic activity. The most recent Riksbank minutes included the following passage on the outlook for policy going forward: “The members thought that it was therefore reasonable to lower the forecast for the repo rate going forward. The repo rate is now expected to be unchanged at zero per cent for a prolonged period”.

CPIF Trending Below Riksbank Two Percent Target

Chart showing CPIF

Note: For a detailed explanation of CPIF, go to the Riksbank’s page here

Norwegian Krone Outlook: CPI, GDP Data on Deck

The Norwegian Krone will also be at the mercy of external risks while also having to contend with local CPI and GDP data. On a year-on-year basis, price growth is expected to show a 1.8 percent increase for October, slightly higher than the prior 1.5 percent print. Quarter-on-quarter, mainland GDP for 3Q is expected to show a 0.8 percent growth rate, 0.01 percent higher than previous publication.

NORDIC FX TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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