OIL: Crude Rally Continues On Supply Concerns, But Another US Stock Build

Goldman Sachs: "USD: All systems still go; upgrading our Dollar forecasts. In our 2025 Outlook, we wrote that we expected the Dollar to be “stronger for longer” because of a combination of solid US growth, continued support for capital inflows, and more protectionist policies. Since then, the Dollar has appreciated even faster than we expected. This has been largely on the back of a shift higher in US policy rate expectations, which tends to be the most supportive environment for the currency. Looking ahead, the critical questions are to what extent these moves will be validated by the incoming data, and whether they already incorporate our expectations for policy shifts in the coming year, particularly higher tariffs. While we acknowledge that FX market participants are clearly expecting some degree of tariff policy changes, and it is difficult to disentangle the drivers of recent moves, we maintain that there is more Dollar strength ahead. In our view, there are three key considerations. First, it is challenging—if not impossible—for FX markets to fully price tariff risks ahead of time because movements in the CNY fix will be critical for the size and composition of the broad market reaction. Second, our models assume a negative growth response to these trade policy shifts, but so far the market has instead upgraded the US growth view since the election. So, even if markets are already fully incorporating tariff risks, there is still some Dollar upside relative to our previous assumptions. Third, and most timely today, we believe that much of the recent Dollar strength reflects the surprising resilience in the US economy and shifting policy expectations. Inflation and labor market outturns have led our economists to make two revisions to their policy path for the Fed in the last month, and they now expect more of a “pause” than a “skip.” As a result, we are upgrading our Dollar forecasts. 

We expect the Dollar to rally by about 5% over the coming year on the realization of new tariffs and continued US outperformance. Even with this upgrade, we still see the risks tilted towards more Dollar strength for three reasons. First, if the economic resilience continues despite higher tariffs, markets could begin to price more two-sided risks around the direction of the next policy move, and this becomes increasingly likely under a longer pause like the one we are now forecasting. Second, our tariff baseline is narrower than recent media reports suggest that the incoming administration is considering; even a targeted universal tariff rate would be more aggressive than we have been expecting if enacted together with higher tariffs on China. Third, it is possible that the shift higher in rate expectations will be more disruptive for rates-sensitive economies, and we think some of the recent moves in places like GBP demonstrate that this risk is starting to impact FX markets. In this vein, we are extending the target on our long USD/SEK trade recommendation to 11.60, in line with our new 3m forecast, and revising the stop to 11.00 to lock in gains." 

USD/JPY saw notable volatility through Friday's US NFP print. The pair spiked to highs of 158.87, levels last seen in July 2024, before retracing quickly. We pulled back to lows of 157.23, before finding some support. The pair tracks near 157.75 in early Monday dealings, with yen up 0.26% for Friday's session, the only G10 currency to rise against the USD for the session. 

• Friday's intra-session lows for USD/JPY remained above the 20-day EMA, which comes in at 156.60, a likely watch point in terms of downside support.
• There were multi support points for the yen, with intervention fears elevated with the pair close to 159.00. An earlier sources report from Friday that the BoJ may upgrade its inflation forecast (BBG) at the Jan policy meeting was another potential saw of support.
• The weakness in global equities, weighed by the sharp rise in US yields post the NFP print, was another yen positive on crosses. The SPX fell 1.54%, while the VIX tested above 20%, but closed back near 19.5%.  
• GBP/JPY fell to lows of 192.20/25, while AUD/JPY dipped sub 97.00. Both pairs recovered some ground and remain above Dec lows at this stage.
• Note local onshore markets are closed today. Tomorrow, we have a speech from BoJ Deputy Governor Himino in Kanagawa. This is at 10:30am local time. 

In local morning trade, NZGBs are 6bps cheaper after US tsy yields gapped higher after Friday’s larger-than-expected December non-farm and private payroll gains and a dip in the unemployment rate. The US 2-year yield rose 12bps to 4.38%, while the 10-year rose 7bps to 4.76%, the highest since November 2023.

• The 256k in December leaves a strong recent trend, with 255k in September, an average of 128k for those two months (initially 132k) before surprisingly reaccelerating again. The unemployment rate of 4.086% in December after very small downward revisions in the prior two months, with 4.23% in November (initially 4.246%) and 4.14% in October (initially 4.15%).
• This week, CPI and PPI inflation measures are on Wednesday and Thursday, respectively. The scheduled Fed speaker docket is muted with the Fed Blackout on Friday.
• NZ home-building approvals rose 5.3% m/m in November, while filled jobs rose 0.3% m/m in November, the first increase since March. Filled jobs rise by 5,980 after declining by ~41,000 from March – October.
• Swap rates are 4-5bps higher.
• RBNZ dated OIS pricing is flat to 2bps firmer across meetings. 51bps of easing is priced for February, with a cumulative 129bps by November 2025.