Crude Oil Falls To 7-Year Low; GBP/USD Rebounds From 1.4955

 | Dec 09, 2015 04:27AM ET

• Crude oil price falls to a seven year low After crude oil peaked at almost $108/barrel in 2014, a massive increase in global production has led prices to currently trade at $40/barrel. The recent excess in supply started pushing prices down in May, following a move from OPEC to protect its market share against new and cheaper techniques to extract oil, such as fracking. The latest dip to $40 however, came as a result of the OPEC decision last week, in which they refused to decrease production, a move that would have driven oil prices up again. Countries such as Canada, the world’s fifth largest oil producer, have experienced large losses in their oil industries, which could be translated to spillover effects in the rest of the economy as jobs are eliminated. We remain bearish on CAD.

• PBoC guides yuan to its lowest level since 2011 ahead of FOMC meeting The Chinese central bank has reduced the yuan’s fixing, which restricts the onshore currency’s moves to 2% on each side, by 0.1 percent. The nation’s authorities are apparently conducting a currency “stress test,” prior to the Fed meeting next week. The move was perhaps motivated by expectations that after a FOMC rate hike, China and most other emerging economies will see a huge increase in capital outflows, or due to the softness in the economy partly reflected in November’s inflation data. A weaker yuan would also help the country’s exports, which continue to decline.

• Overnight: The Chinese CPI and PPI data for November showed that while consumer prices accelerated slightly, producers’ prices fell at the same pace as the previous month which is the worst since the global financial crisis. Bearing in mind that both imports and exports have continued to decline in November, many expect that the Chinese economy will print its slowest expansion in Q4 for a quarter of a century. In an attempt to jump start the sluggish economy, the PBoC has already cut interest rates six times since last November and lowered the banks’ reserve ratios, while the government has introduced a series of reforms to boost domestic demand. The weak inflation data could reinforce expectations for the central bank to release more stimulus in the coming months.

• Today’s highlights: The Reserve Bank of New Zealand holds its monetary policy meeting. Although the Bank left the rate unchanged in October, it warned that it may need to cut rates in the future to offset the deflationary impact of the stronger currency. Followings signs that inflationary pressures have slowed somewhat, and given the NZD has been appreciating recently, expectations are for a 25bps rate cut, which could put downward pressure on the kiwi. However, the magnitude of the impact could depend not just on the decision itself, but also on the statement accompanying the decision. A possible rate cut may have a somewhat muted effect on the kiwi if the bank signals that this is the end of this easing cycle.

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• As for indicators: From Europe, Germany’s trade surplus increased by more than expected in October, while in the US, wholesale inventories for the same month are forecast to have slowed.

• We only have one speaker on Wednesday’s agenda: ECB Executive Board member Sabine Lautenschlaeger.

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