WTI oil futures sustain bullish bias but with some caution

The dollar index was sharply lower after mixed US labor data which showed hiring above expectations in October, but higher unemployment and lower wage inflation, warning that job growth may slow in coming months. Although the data suggest loosening in the labor sector’s activity that implies the Fed may also start slowing its policy tightening, the latest comments from Fed Chair Powell signal that the central bank will remain on path to continue its hawkish monetary policy stance. The dollar was down over 1.5% by the mid-US session on Friday and developing reversal signal on daily chart, as today’s strong fall has retraced nearly 61.8% of 109.35/113.02 upleg. Fresh bearish acceleration also penetrated thick daily cloud, with broken top (111.49) reverting to strong resistance and today’s close within the cloud would add to negative signals, reinforced by growing bearish momentum and south-heading stochastic emerging from overbought territory. This would  keep fresh bearish bias for possible extension through 110.75 pivot (Fibo 61.8% / 55DMA) towards psychological 110 support. Res: 111.49; 111.62; 112.16; 112.81 Sup: 111.19; 110.75; 110.22; 110.00

Oil prices are trading this Friday at their highest in nearly a month, benefiting from the looming tighter supply as an effect of market speculation around potential zero-Covid policy relief in China. In addition to the reduction in the OPEC+ production target of 2 million barrels per day for the month of November, the EU embargo and the planned cap on the price of Russian oil add to the pervasive tension in the market. In addition, the G7 member countries and Australia have agreed to set a fixed cap for the price of Russian oil rather than a variable rate in the interests of clarity, while the United Kingdom has aligned itself with the European Union by prohibiting British ships and service providers from contributing to the maritime transport of Russian oil sold above the fixed price set by the G7 and Australia. In fact, the services covered by the ban include crude oil transport insurance, a type of insurance called protection and indemnity (P&I) essential for oil tankers covering risks ranging from wars to environmental damage for amounts that can be colossal. Actually, the United Kingdom holds 60% of this market. On the other hand, the US dollar has weakened today against a basket of major currencies: US Dollar Currency Index (DXY) CFD (daily chart) On the WTI Crude Oil chart, by zooming out over the weekly chart, here is what we have now: WTI Crude Oil (CL) Futures (Continuous, weekly chart) So here on the long-term horizon, the overall structure of the crude oil market shows an upward trend. Until today we were in a bearish trend on the daily chart (in a mid-term horizon), however, by rallying above its previous month's high, the WTI might be signaling a trend change by switching into bullish territory again. Given the recent disagreements between Saudi Arabia-led OPEC+ – reducing its output of crude production – and the United States just as they are entering their mid-term elections, we could expect some manipulations on the oil futures market to push prices lower, the same way it has been done in the gold market over the past 20 years or so. However, the main difference here lies in the fact that the crude oil futures market – unlike the gold market which is mainly used for hedging purposes, portfolio diversification and speculation through paper trading – entails a much larger share of physical deliveries by major market players, which is what makes it more difficult to manipulate.

China's covid policy hasn't led to a nationwide lockdown, so it's more of a metaphor to talk about "reopening". However, the economic impact from a shift in the current zero-covid policy could be seen as a parallel to when other countries "reopened" in 2021 (and then were subject to renewed restrictions with the omicron variant). More importantly, the change in policy in China is expected to have global implications. So far, changes haven't been officially confirmed, so here are some things to keep in mind ahead of any possible changes. The latest Overnight, there were unverified twitter reports that the Chief Scientist at China's CDC Zeng Guang had said that economic development would be prioritized over covid prevention. This followed prior speculation about when China would pivot away from zero-Covid policy. Reports circulated earlier in the week that China had formed a commission to revise policy related to coronavirus, but that policy wouldn't change until March. Note that in March is when the new leaders appointed following the last CCP Congress take office. It was also reported yesterday that Chinese officials were modifying how covid restrictions were communicated in order to reduce the impact. Reportedly, officials were privately talking to certain businesses and locations to curb covid spread, instead of making broad public announcements. But they are still rumors Chinese health authorities are scheduled to hold a press conference on "targeted covid prevention" tomorrow. Many speculate this could be an opportunity to announce either a new policy, or to tweak existing policy in a way that would substantially reduce the economic impact. There had been rumors for a while that China could start relaxing covid measures after the CCP Congress, but that didn't materialize. As of yet, there hasn't been any confirmation that a change in policy is imminent, though that might come as soon as over the weekend. The implications China's economy has been significantly impacted by a combination of the zero covid policies and the near collapse of the housing market (which is also attributed to issues around covid). The mere rumor that restrictions could be lifted in a few months' time sent markets in China shooting higher. The rolling lockdowns created uncertainty around which industries and areas might suddenly be affected, slowing investment. A formal acknowledgement that zero-covid would be replaced with a policy that did not include lockdowns would likely substantially support the Chinese economy - and increase demand for imported goods, particularly from Japan, New Zealand and Australia. The outlook Slowing growth in China is one of the factors contributing to an expected global recession in the coming months. That contributed to lower oil prices, as well as other commodities. But a return of consumer demand could give China similar headaches as other countries: rising inflation and the need for the PBOC to start tightening policy. With the housing market already in trouble, higher interest rates could make the internal economy a little shakier. But increases in productivity could help global supplies. And the stronger yuan could support increased imports of raw materials.

Summary United States: FOMC Still Has Cover to Focus on Inflation Employers continued to add jobs at a steady clip in October, demonstrating the labor market remains tight and the FOMC will continue to tighten policy. The size of the December rate hike depends on the incoming data. October payrolls do not move the needle much toward a 75 bps hike, and they give the Fed cover to continue to focus on inflation. Next week: Small Business Optimism (Tue), CPI (Thu), Consumer Sentiment (Fri) International: Bank of England Hints at a Slowdown The Bank of England (BoE) raised its policy rate aggressively at this week's monetary policy announcement, raising its Bank Rate by 75 bps to 3.00%. The increase matched the consensus forecast; however, there were also signals from the BoE that the pace of tightening will likely slow going forward. Next week: Brazil CPI (Thu), Mexico Rate Decision (Thu), UK GDP (Fri) Interest Rate Watch: Will the FOMC Slow the Pace of Tightening in Coming Months? For the first time in this rate hiking cycle, the FOMC said that it would take into account the cumulative amount of tightening when deciding future monetary policy moves. Does a slower pace of tightening lie ahead? Credit Market Insights: Raising the Bar: EU Lending Standards Tighten in Q3 Last week, the European Central Bank (ECB) released its Bank Lending Survey for Q3-2022. Bank participants in the survey indicated that there was a net tightening of credit lending standards in the face of decades-high inflation and recession fears, with standards tightening for enterprises, home purchases and consumer credit. Topic of the Week: Homeownership Rises Over the Year, but Affordability Challenges Persist The latest Quarterly Residential Vacancies and Homeownership report was released on Wednesday. The report shows that the U.S. homeownership rate was 66.0% in the third quarter, up 0.6 percentage points over the year. Read the full report

There are only a handful of events next week but they will be crucial for markets. A divided Congress is the most likely outcome when Americans go to the ballots, setting the stage for two years of political deadlock. Meanwhile, the latest US inflation data will decide the pace of future Fed rate increases and by extension, the dollar’s fortunes.