“OPEC Has A Deal!” Buy Euros! Wait, There’s A French Election? Welcome To Thursday.

Let’s start with oil real quick, because there are some notable headlines on Thursday morning.

Recall that things took a decisive turn for the worst on Wednesday after EIA data confirmed Tuesday’s bearish API print(s). Specifically, the crude draw came in lower than expected (just like API) and the unexpected gasoline build was even bigger than the API build tipped the day before. And of course crude production keeps hitting new highs. So ultimately, we got this:

That meant it was time for some serious (call it “big league”) jawboning which is exactly what we got from OPEC. Here’s a bullet point summary from Bloomberg:

Gulf Cooperation Council countries agreed to push for extension in meeting on Wednesday, Oman Oil Minister Mohammed Al Rumhy says in an interview in Abu Dhabi.
Iran, Venezuela show support for extension of cuts
GCC states are OPEC members Saudi Arabia, Kuwait, Qatar, U.A.E., in addition to Oman, Bahrain; All GCC member states were part of global agreement to cut output
“There is an initial agreement, but we didn’t communicate with all countries which is we might be obligated to extend to get to our target,” Saudi Arabia’s Oil Minister Khalid Al-Falih says at conference in Abu Dhabi.
First 3 months of cuts failed to bring inventories below 5- yr average
Reducing stockpiles is main target of producers in their deal to cut output
“Although there is a high level of commitment we haven’t reached our goal which is to reach the 5-year average”
Earlier, OPEC Faces Surprise Outcome After Oil Cuts: Higher Stockpiles
Initial numbers for March show improvement in non-OPEC compliance with cuts: Kuwait Oil Minister Issam Almarzooq
OPEC, non-OPEC producers in cuts agreement to meet May 25 to decide on next plan: Almarzooq
Global oil demand will grow 1.2-1.4m b/d this year: Qatar Energy Minister Mohammed Al Sada
Meeting global oil demand needs huge investments: Sada
Shale oil growth could slow market balancing: U.A.E. Energy Minister Suhail Al Mazrouei

So that’s being called an “initial deal” on an extension of the production cuts. Expect that to be subject to all manner of headline hockey and contradictory signaling between now and next month. But for the time being it may (and I would emphasize “may”) be enough to keep crude buoyant.

Meanwhile, the euro hit its strongest level against the dollar since March 29 as investors cut shorts in the spot market ahead of Sunday’s all-important electoral trial by fire in France. “Investors have cut back on hedging positions throughout the week, with euro-Swiss franc hitting a two-week high Thursday,” traders said, adding that “demand for fresh long exposure versus the dollar was also seen as euro bulls took comfort from $1.0700 support holding up.”

This despite comments out of Melenchon that I’m not entirely sure should have been treated as bullish. “Our ideas our reasonable,” he said on BFM TV. “Our two previous presidents never tried to negotiate anything with Mrs. Merkel after promising they would [but] we have a Plan B: Either we change Europe, or we leave.”

Any questions?

Well anyway, here’s a look at the overnight action:

This of course comes as USDJPY and 10Y yields are trying to find (and keep) their footing in what can only be described as a “slippery slope” environment. Things went ok in that regard on Wednesday but the situation is tenuous.

Here’s SocGen’s Kit Juckes with some relevant color on that and everything else said above:

The yield on 10yr US TIIPS edged back up to 35bp and the dollar duly stabilised. The Beige Book however did nothing to really encourage market expectations of a mid-year Fed rate hike, fuelling concerns that maybe there will be only one further hike in 2017.

The Fed’s biggest challenge may be that inflation expectations are still falling, steadily decoupling from its 2% target. It’s hard to see how the Fed can remain hawkish against a backdrop of falling inflation expectations and hard, in the process, to see the dollar getting more than a nominal bounce until there are clearer signs of economic robustness.

Meanwhile, oil inventories are building again, and that has given EM and commodity currencies a more vulnerable air just for now. We’d still like more attractive entry levels into longs in AUD and CAD, against USD, JPY or NZD.

USD/JPY has been faithfully following real yields, and does look increasingly like a buy closer to 105. AUD/JPY may come back into its own at around the same time. We just can’t see the justification for US real yields to fall all that much further, and stability around here may be all that is needed to get USD/JPY trending back up within the current trading range.

The bigger dollar story remains against the euro. French election polls continue to show the top four candidates’ poll rankings bunching around 19-23%, which will keep markets nervous, though the only major risk to the market is that Le Pen and MÃ©lenchon make the second round together – something that is getting slightly less likely as M. MÃ©lenchon’s poll ranking fails to break above 20%.