Sasfin : Forex Daily Market - Oil markets have kicked off on the front foot

Today's Talking Point

Oil update

Analysis: Oil markets have kicked off the new year on the front foot, with the front-month Brent contract edging higher to just over $78 per barrel, testing its 50DMA technical resistance level. The gains come amid some dip-buying following the selling pressure seen on the last trading day of 2021, while output disruptions in Libya add further support. The disruptions are expected to see output from the African nation cut by 200k barrels per day over the next week. This will see total output from the country trimmed to just 700k barrels per day, its lowest level in more than a year. To give some further context, the country averaged around 1.2mn barrels per day through 2021. These disruptions come just ahead of the first OPEC+ meeting for 2022, where it is widely expected that the cartel and its allies will vote to keep increasing output by 400k barrels per day through February. The demand outlook remains robust despite the continued fears over the Omicron variant of COVID-19, providing room for a continued gradual increase in production that will not disrupt prices. This increase is already priced in and thus the meeting shouldn't be too market-moving, unless we get some surprise announcements. This positive demand outlook is being reflected in near-dated timespreads, with Brent's prompt spread back in backwardation after briefly slipping into contango towards the end of last year.

Rand Update

Welcome back to all readers. We wish you a healthy, happy, and prosperous year ahead. Following a tumultuous 2021, we start the new year with certain key themes carried over from last year. Most prominently, the COVID-19 pandemic remains the order of the day, with all eyes on the Omicron variant that emerged in Q4 of last year. Note that financial-market headwinds on this front are easing, with the general narrative starting to reflect the reality that this variant appears to be less virulent and dangerous than previous ones despite its faster rate of spread.

However, the consequent decline in expected economic disruption from COVID-19 has paved the way for an accelerated normalisation of global monetary policy through 2022. As central banks across the globe face a significant challenge in the form of stubbornly high inflation, they will continue to tighten monetary conditions in the months ahead. In turn, this will further disrupt and redirect global capital flows, with the net result expected to be increased volatility and continued USD strength (note that the release of the Fed's latest policy meeting minutes on Wednesday and official December employment report on Friday will provide fresh insights into prospective Fed tightening this week).

While these macro themes play out in the background, the big news out of SA this morning is yesterday's fire at the parliamentary precinct in Cape Town. The full extent of the damage caused by the blaze, which is being investigated by the Hawks, is still being assessed, while a suspect has been arrested on theft and arson charges. Note that although the fire and its cause are attracting strong interest from the general public, it holds nothing in the way of economic or market-moving significance and will most likely be ignored by investors.

Bond Update

The first trading session of the year is likely to be a quiet one given that various exchanges, including the London Stock Exchange, enjoy a public holiday today. London's prominence in market volumes suggests that position sizing in the European session will likely be kept to a minimum, giving traders a little breathing room on the first day of the year.

While the session ahead will be a lower liquidity one with little data for the market to digest, the rest of the week has some significant US data scheduled. On Tuesday, the December US ISM data is released. On Wednesday, investors will digest FOMC minutes and the ADP employment report, Thursday will feature initial jobless claims, more ISM, and durable goods data.

On Friday, the December non-farm payrolls report will hold significance for the Fed rates outlook. From all indications, a tighter policy environment is expected, although investors continue to price in less risk of rate hikes than the Fed dot plots predict. Political factors could be at play given that US midterm elections are scheduled for 2022. Investors could well price in the risk of political change amid a contentious Biden presidency. The Fed may struggle to tighten as needed in such an environment.

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