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FX Week Ahead: OPEC meeting, FOMC minutes & BoC meeting

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The week ahead is likely to turn busy with the focus shifting back to the economic and monetary policies. Coming up this week, the key events include the OPEC meeting in Vienna, where the question is whether OPEC members will extend production cuts.

In the US the FOMC meeting minutes from the May FOMC meeting will be released. The minutes could revive the rate hike odds which has been slipping steadily since the May 3rd FOMC meeting.

The Bank of Canada’s interest rate decision is due this week, but no major changes are expected. Besides these key events, the UK’s inflation report hearings, Germany’s Ifo business climate and the GDP revisions from the US and the UK are lined up over the week.

OPEC Meeting in Vienna – Saudi & Russia could formalize production cuts

On May 25th, the Organization of Petroleum Exporting Countries will be holding the 172nd OPEC meeting at OPEC headquarters in Vienna. The outcome of the meeting will be crucial for the oil markets as a decision to extend the oil production cuts could be extended.

Following the decision to cut oil production last year, despite some setbacks Saudi Arabia had to take a majority cut in oil production. This came as the nation and OPEC had to make up for the exemptions which included countries such as Libya and Nigeria.

WTI Crude Oil: 50.86
WTI Crude Oil: 50.86

The oil production cut has led to nearly 10% gain in prices since November last year. As of April, oil output from the 13-nattion OPEC fell to 31.73 million barrels per day (bpd) which was down 18,000 bdp from March’s production.

So far, the narrative has been that Russia and Saudi Arabia have agreed to extend the production cuts until March 2018. However, a formal announcement on this is yet to be made, which is expected to happen at this week’s OPEC meeting.

However, the major issue has been that with oil prices rising, non-OPEC supply, more importantly from the U.S. shale industry has been edging higher. According to OPEC, non-OPEC supply growth is expected to rise to 0.95 million bpd, compared to 0.58 million bpd for 2017.

So the question is whether OPEC and Russia will go ahead with the production cuts while allowing for the US shale oil producers to take advantage of the higher prices.

FOMC Meeting Minutes – Will rate hike odds be lifted?

The US Federal Reserve will be releasing its meeting minutes from the FOMC meeting that was held on May 2 – 3, 2017. The meeting minutes is expected to elaborate on the policy makers deliberations.

At the meeting, Fed officials had brushed aside the weak economic activity in the first quarter and maintained its view on staying on track for further rate hikes this year. The FOMC meeting prompted the markets to begin pricing in a rate hike at the next meeting, due on June 13 – 14, 2017.

CME Group Fed Funds (futures) probability tool
CME Group Fed Funds (futures) probability tool

However, the initial euphoria for the rate hike started to fade with the Bloomberg probability of a rate hike in June fell from 85% on May 9, 2017, to 58% as of last week before recovering slightly.

The CME Group’s Fed funds futures probability stands above 75% s of last Friday, May 19, 2017. The markets will still have to wait for the May jobs report while the overall expectations for two more rate hikes this year remains.

There hasn’t been much of Fedspeak that has impacted the markets since the past two weeks. Loretta Mester, Cleveland Fed President, but a non-voting member said last Thursday that the recent market volatility did not affect her economic outlook.

She stated that the temporary fluctuations must be overlooked and instead focus on the implications on the medium-run outlook.

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