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Oil Prices to Remain Volatile as Irma Approaches Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Wed Sep 06 17 00:42 ET

Unnerved by North Korea's threat that there could be "more gift packages" to the US, stock markets retreated, with Asian shares broadly lower after a decline in the Wall Street. What lifted by heightened geopolitical tensions in the Korean peninsula were Japanese yen, gold price and Treasuries. US dollar weakened against major currencies, after dovish Fed comments, soft macroeconomic data flow and looming debt ceiling deadline. The DXY index slipped -0.41%. The greenback performed the worst against Australian dollar (AUDUSD: +0.84%) and Japanese yen (-0.8%). USDCAD dropped -0.58% ahead of the BOC meeting. Canada's 2-year yield has surpassed the US yield for the first time since June 2016, likely weighing on USDCAD in the near-term. In the commodity sector, crude oil prices climbed higher on rising demand as more refineries have resumed operations after Hurricane Harvey. The front-month WTI crude oil contract gained +2.9% while the Brent contract was up +1.99%. The Nymex RBOB gasoline contrac, however, fell -2.79%, after slumping -18.32% last Friday. Oil traders are cautiously monitoring the development of Category 5 hurricane Irma which is on course to make landfall in Florida at the weekend.

In response to potentially stronger sanctions, Han Tae-song, North Korea's ambassador to the UN indicated that he's proud that his country, on September 3, "successfully carried out a hydrogen bomb test for intercontinental ballistic rocket under its plan for building a strategic nuclear force". He stressed that "the recent self-defence measures" are "a gift package addressed to none other than the US", adding that "the US will receive more gift packages from my country as long as it relies on reckless provocations and futile attempts to put pressure" on North Korea.

In the US, the Federal Emergency Management Agency (FEMA) noted that it would run out of money by Friday. Its Disaster Relief Fund had just US$1.01B on hand, of which about US$541M was "immediately available" for response and recovery efforts related to Hurricane Harvey. The agency noted that it would be not be able to allocate cash for the emergency aid required in Texas and other states as a result of Hurricane Harvey, not to mention the approaching hurricane Irma. It was reported that Republicans have planned to attach a bill to fund FEMA with a debt limit bill for vote to the Senate.

On the macroeconomic developments, US factory orders contracted -3.3% m/m in July, while Junes' growth was revised higher to +3.2%. Separately, the dovish Fed Governor Lael Brainard suggested that the Fed should be "cautious about tightening policy further" until it is "confident [that] inflation is on track to achieve our target". She acknowledged, however, that "there are few signs of a dangerous buildup of leverage or of maturity transformation", as a result of the accommodative monetary environment. Adding to the dovish mode was Minneapolis Fed President Neel Kashkari's comment that "it's very possible that our rate hikes over the past 18 months are leading to slower job growth, leaving more people on the sidelines, leading to lower wage growth, and leading to lower inflation and inflation expectations".

The focus today is on the BOC meeting. Recent strong dataflow from Canada has raised bets for a rate hike this month. Real GDP growth accelerated to +4.5% in 2Q17, form +3.7% in the prior quarter. The improvement was significantly better than expected. However, inflation has stayed way below target. It would also be prudent for BOC to be more cautious over tightening the monetary policy as NAFTA talks remain highly uncertain. We expect policymakers to keep the policy rate unchanged at 0.75%, while a rate hike would be implemented in October. The surprisingly strong second quarter GDP growth would also lead the central bank to upgrade its economic forecasts at the October meeting.


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