Dollar surged broadly last week as Fed delivered the expected rate hike and painted a more hawkish rate outlook for 2017. Dollar index resumed the long term up trend and reached a 14 year high at 103.56 before closing at 102.95. In particular, EUR/USD took out 1.0461 key support level and reached the lowest level since 2002. Nonetheless, Yen and commodity currencies were hardest hit. Rally in Dollar was accompanied by extended rally in treasury yields as 10 year yield breached 2.6 handle before closing at 2.597. Gold suffered deeper selling on dollar trend to close at 1136.8 while WTI crude oil pared back much of the post OPEC gains to close at 51.90. However, stocks turned mixed despite Fed raising GDP projection for next year. DJIA struggled to power through 20000 handle and closed the week slightly higher at 19843.31. The markets may turn into consolidation mode as holidays approach. But strength in Dollar will likely carry on to early next year.

To recap last week's central bank activities, Fed increased the policy rate by 25 bps for the first time in a year. While this had been widely anticipated, the 'dot plot' indicated that the members expect three hikes in 2017, up from two previously. The accompanying statement was in a hawkish tone, upgrading the assessments to the economic outlook. The members reinforced that 'near-term risks to the economic outlook appear roughly balanced. Fed Chair Janet Yellen made no hint on how the new fiscal policy would affect the monetary stance. Yet, she stressed there is non-negligible uncertainty regarding the new policy. More in Fed Raised Rates by +25 Bps, Expects Three Hikes In 2017.

Three major European central banks held monetary meeting last week, including BoE, SNB and Norges bank. All left their policy rates unchanged. Moreover, all pointed to higher uncertainty in the global economic outlook. BoE kept its Bank rate unchanged at a record low of 0.25%. The sizes of government and corporate bond purchases also stayed unchanged at435B pound and up to 10b pound, respectively, in December. Policymakers warned that the recent strength in sterling might cool inflation in the medium-term. SNB held deposit rate steady at -0.75%, while Norges bank left kept its deposit rate steady at 0.5%. More in BOE, SNB, Norges Bank On Hold After Fed's Rate Hike.

10 year yield took out 2.489 key resistance after some hesitations in recent week. The strong break indicates that markets have made up their mind after FOMC meeting last week. Current up trend should extend to 3.036 resistance next in medium term. From the long term perspective 3.036 will now be a key resistance to overcome. But decisive break there will complete a double bottom pattern (1.394, 1.336) will bullish convergence condition in monthly MACD, which will be a strong sign on long term trend change. This could be the defining point in first half of next year.

Dollar index's up trend has resumed for next medium term target at 61.8% projection of 78.9 to 100.39 from 91.91 at 105.19. A major question in the long term outlook is whether current rise from 91.91 is the fifth wave of the whole rise from 71.69. Normally, in that case, 105.19 could be a strong resistance level which the dollar index would be repelled back through prior resistance at 100.39. However, considering that EUR/USD has just took out 1.0461 support to resume the long term down trend, which will likely break parity easily based on current month. EUR/USD is indeed projected to head to 0.9115 in medium term. Hence, even if the fifth wave scenario holds, Dollar index would still likely extend to 100% projection at 113.40 before making an important top. But in any case, 105.19 is the level to pay attention in first quarter of next year.

Regarding trading strategies, firstly, we're holding on to our AUD/USD short (sold at 0.7550). The position looked shaky as the consolidation pattern from 0.7310 was longer and stronger than we expected. Nonetheless, while AUD/USD recovered to 0.7523, it was held below our stop at 0.7550. Subsequent sharp fall now affirmed our bearish view. That is, the medium term correction pattern from 0.6826 has completed and long term down trend is resuming for a new low. We will hold on to the short position, lower the stop to 0.7450. 0.7144 support is the first target but we'll most likely not exit at that point. 0.6826 is the second target in medium term. Stay tuned and we'll keep updating the strategy every week.

Secondly, EUR/USD dipped to 1.0504 last week and recovered to 1.0669. Then the pair finally dived through 1.0504 support. Our sell EUR/USD on break of 1.0504 was triggered. As noted before, EUR/USD should have resumed the long term down trend from 1.6039. Parity would be the first target but we're looking at next medium term projection target at 0.9115. To give the down trend a little breathing room, we'll hold on to EUR/USD short with a wider stop at 1.0670. Meanwhile, we'll be closely watching EUR/GBP to see if the near term fall from 0.9304 would reverse. And in that case, we "might" switch the position to GBP/USD short. But we'll just keep an eye there first.

EUR/USD Weekly Outlook

EUR/USD dropped to as low as 1.0365 last week as recent decline resumed. The break of 1.0461 support also indicated larger down trend resumption. Initial bias remains on the downside this week for next near term target at 100% projection of 1.1298 to 1.0518 from 1.0872 at 1.0092, which is close to parity. On the upside, above 1.0524 minor resistance will turn bias neutral and bring consolidations before staging another decline.

In the bigger picture, break of 1.0461 key support indicates that consolidation from there has completed as a triangle at 1.1298. And, the down trend from 1.6039 (2008 high) is resuming. Current downtrend is now expected to target 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

In the long term picture, the down trend from 1.6039 (2008 high) is still in progress and there is no clear sign of completion. We'd expect more downside towards 0.8223 (2000 low) as long as 1.1298 resistance holds.

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Of the three major European central banks held monetary meeting on Thursday, all left their policy rates unchanged. Moreover, all pointed to higher uncertainty in the global economic outlook. BOE kept its Bank rate unchanged at a record low of 0.25%. The sizes of government and corporate bond purchases also stayed unchanged at435B pound and up to 10b pound, respectively, in December. Policymakers warned that the recent strength in sterling might cool inflation in the medium-term. SNB held deposit rate steady at -0.75%, while Norges bank left kept its deposit rate steady at 0.5%.

BOE: While leaving the monetary and QE measures unchanged, the members affirmed that 'monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the +2% target'. In the concluding paragraph, the central bank reiterated that it 'remains committed, as always, to taking whatever action is needed to ensure that inflation expectations remain well anchored, and that inflation returns to the target in a sustainable fashion'.

The members acknowledged the recent rally in longer-term interest rates, attributing it partly to US' new fiscal policy. The members noted that if the US loosens its fiscal policy, it 'will help to underpin the slightly greater momentum in the global economy evident in a range of data since the summer'. On exchange rate and inflation, BOE suggested that the +6% rally in trade-weighted sterling since the previous meeting, notwithstanding higher oil prices, would 'point to less of an overshoot in inflation relative to the target in the medium term, though month-to-month volatility was to be expected as market participants' views on the United Kingdom's future relationship with the European Union continued to evolve'.

On the global economic outlook, BOE warned that 'the global outlook has become more fragile, with risks in China, the Euro area and some emerging markets, and an increase in policy uncertainty'.

SNB: Also as widely anticipated, the deposit rate stayed unchanged at -0.75%. The target range for the three-month Libor steadied at between –1.25% and –0.25%. However, Governor Thomas Jordan left the door open for further easing, noting that 'we cannot rule out that a further step lower will become necessary'.

SNB welcomed FOMC’s rate hike decision, noting that it is a 'positive sign that the world is moving in that direction' and that the US economic conditions are improving. It also hoped that the Fed’s move would help normalize global monetary conditions. While USD strength should ease the appreciation pressure of Swiss franc, SNB reinstated that the franc remained 'significantly overvalued' and pledged 'willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive'.

The central bank warned that the world economy is subject 'considerable risks', in particular the 'multitude of political uncertainties' facing Europe.

Norges Bank: Surprisingly, the central bank kept the bottom of the rate path at 40 bps. This reflected the concerns over the increases I housing prices and financial stability. As Governor Oystein Olsen noted in the press conference, 'financial imbalances have been building up for quite some time related to the high growth of debt in the household sector and accelerating housing prices… That trend has continued recently, and forms part of the background for our decision on the interest rate'.

Swiss National Bank leaves expansionary monetary policy unchanged

The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. Interest on sight deposits at the SNB is to remain at -0.75% and the target range for the three-month Libor is unchanged at between -1.25% and -0.25%. At the same time, the SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration. The SNB's expansionary monetary policy is aimed at stabilising price developments and supporting economic activity. The negative interest rate and the SNB's willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing pressure on the currency. The Swiss franc is still significantly overvalued.

Compared to September, the new conditional inflation forecast has been revised slightly downwards in the short term. This mainly reflects the fact that inflation in October and November was slightly lower than expected. The SNB nevertheless anticipates an unchanged inflation rate of -0.4% for 2016. For 2017, however, the forecast is down to 0.1%, from 0.2% in the previous quarter. For 2018, the SNB now expects inflation of 0.5%, compared to 0.6% in the third quarter. The conditional inflation forecast is based on the assumption that the three-month Libor remains at -0.75% over the entire forecast horizon.

The global economy has continued to recover in line with the SNB's expectations. In the US, third-quarter GDP growth was again significantly above potential. Furthermore, the situation on the labour market continued to improve. The other major economic areas also recorded favourable economic activity in the third quarter. The euro area and Japan continued to register moderate growth, while in China, growth remained strong thanks to a variety of fiscal measures. In the UK, the economic impact of the Brexit decision has so far proved less pronounced than originally feared.

Full release

The Fed increased the policy rate by +25 bps for the first time in a year. While this had been widely anticipated, the 'dot plot' indicated that the members expect three hikes in 2017, up from two previously. The accompanying statement was in a hawkish tone, upgrading the assessments to the economic outlook. The members reinforced that 'near-term risks to the economic outlook appear roughly balanced. Fed Chair Janet Yellen made no hint on how the new fiscal policy would affect the monetary stance. Yet, she stressed there is non-negligible uncertainty regarding the new policy.

On the economic assessment, the FOMC acknowledged that the employment market has continued to 'strengthen', with 'solid' job gains and 'decline' in the unemployment rate seen in recent months. It noted that economic activity has expanded at 'a moderate pace since mid-year'. Household spending has risen 'moderately' but business fixed investment has remained 'soft'. Inflation has 'increased since earlier this year', compared with November statement’s 'increased somewhat', but is still below the Committee's +2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports'. It also noted that market-based measures of inflation compensation have 'moved up considerably', compared with November statement’s 'moved up', but still are low. The Fed suggested that the accommodative monetary policy would continue to support 'some further strengthening in labor market conditions', The use of the word 'some' signals that the Fed judged that the market is now close to operating at full employment.

As the press conference, Yellen indicated that it’s 'far too early' to judge the effects of fiscal policy on the Fed’s policy stance but cautioned the 'considerable uncertainty' around the fiscal policy under Trump’s government. She added that 'fiscal policy is not obviously needed to provide stimulus to get back to full employment' and noted some risks of loose fiscal policy, including an elevated debt-GDP ratio and the possibility of inflationary overheating. Yellen left the door open for staying after her term ends in February 2018. While it is a custom for Fed chairs to leave the central bank after their terms expire, Yellen could stay on as a board member as her 14-year term on the Fed’s board of governors doesn’t expire until January 31, 2024. President-elect Donald Trump has indicated that he would likely replace Yellen after her term ends.

Yellen downplayed the median projections of three rate hike in 2017, compared with two previously, emphasizing that the change was 'modest' and only represented a small shift in the thinking of several committee members. The forward guidance in the statement also reaffirmed that the current 'economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate'.

Recent releases in China's November macroeconomic indicators suggest that growth continue to stabilize. Yet, weakness in renminbi means that capital outflow should remain a headache. China's growth in industrial production (IP) improved to +6.2% y/y in November, from +6.1% a month ago. This came in better than consensus of +6.1%. Retail sales expanded +10.8% y/y in November, compared with expectations of +10.2% and +10% in October. Indeed, this is the fastest pace of consumer spending growth so far this year. A key contributor to the upside surprise was auto sales, thanks to government tax incentives. Meanwhile, 'single's day earlier in November also helped boost sales of electronics and telecom products. Urban fixed assets investment gained +8.3% in the first 11 months of the year, unchanged from the year through October. This came in line with expectations.

On inflation, headline CPI accelerated to +2.3% y/y in November from +2.1% a month ago. The improvement mainly came from the food inflation which rose to +4% y/y from October's +3.7%. This was in turn driven by the large +15.8% gain in vegetable price. Core CPI also rose to a 3-year high to +1.9% y/y, from +1.8% in October. This compares with January's low of +1.2%. PPI inflation rallied to +3.3% y/y from +1.2% in October. This beat expectations of +2.3%. The month-over-month rally (+10.3%) of coal and mining materials prices was the biggest driver. The recent trend suggests that risks on inflation for the coming year is skewed to the upside and rising inflation would also push the nominal GDP growth higher.

The country's FX reserve continued to decline, shrinking –US$ 69.1B to US$ 3.05 trillion, in November. Capital outflow in China continued and has been worsened by persistent depreciation in renminbi. USD's rally has exacerbated the weakness in renminbi with USDCNY soaring to the highest level since 2008 last month. Besides selling foreign currencies to support renminbi, the Chinese government has tightened capital control. A Reuters report last week suggested that the State Administration of Foreign Exchange (SAFE) had begun vetting transfers abroad worth US$5M or above and was increasing scrutiny of major outbound deals. In response to the restrictions, the American chamber noted that it was 'concerned about the added burden such approval requirements may potentially have on our member companies' ability to move money overseas'. The EU Chamger criticized that 'the unpublished window guidance on the control of capital outflow is disruptive to EU companies' regular business operations'

ECB surprised the market by announcing tapering plan for its bond purchases program. The Governing Council decided to extend the program until December 2017. However, the pace would slow down to 60B euro per month from April 2017, compared with the current 80B euro. The market generally anticipated ECB to extend the program for 6 months without changing the pace of purchases. The market was disappointed. German yields spiked to a one-year high. The single currency soared to a one-month high of 1.0872 immediately after the announcement. However, gains were erased with EURUSD dropping more than -1%, as ECB left the door open to extend QE further beyond December 2017 and/or pick up the pace of bond buying again if the economic conditions deteriorate. Despite disappointing in first sight, the ECB has indeed delivered more than the market had anticipated: 9 months*60B euro = 540B euro vs consensus of 6 months*80B euro = 480b euro. Has the ECB has again disappointed the market by doing more?

At the press conference, President Mario Draghi indicated that the "calibrations" announced reflect the "moderate but firming recovery of the euro area economy" and the "subdued underlying inflationary pressures". He added that the members still expect the region's economy to recover at a "moderate but firming" pace with the risks to growth are skewed to the downside. In answering a question regarding the advantage of extending QE for 9 months at 60B euro per month, over an extension for 6 months a 80B euro per month. Draghi noted that ECB wants to ensure a sustained pressure on market prices, without distorting them of course. He affirmed that the reduction in size does not mean tapering. There were also some changes in the parameters of the QE with the ECB now allowed to buy government bonds which are yielding less than its deposit rate of -0.4%. Moreover, there are some changes to its securities lending program with cash now accepted as collateral.

The Governing Council also released its latest staff economic projections. GDP is now expected to grow by +1.7% in 2016, unchanged from September's projection, and remain steady at this rate in 2017 (September: 1.6%). However, growth would then moderate to +1.6% in both 2018 and 2019. On inflation, the Eurosystem staff forecast HICP to reach +0.2% this year, unchanged from September's projection, before accelerating to +1.3% in 2017 (September +1.2%), +1.5% in 2018 (September +1.6%) and +1.7% in 2019. At the press conference, Draghi admitted that inflation forecast of +1.7% in 2019 is not close enough to the +2% target. Draghi believed rising oil prices would eventually feed into inflation. He, however, warned that one should see if "it's just a one-off effect, whether it has any secondary effects, and if it effects inflation excluding energy costs".

Draghi attempts to calm the market by noting that the program "goes until December 2017 or beyond, if necessary, and until we see a sustained rise in inflation". He added that today's move was made with "very, very broad consensus".

BOC, as widely anticipated, left the policy rate unchanged at 0.5% in December. The central bank maintained a dovish tone as in recent meetings. While acknowledging that global market conditions have 'strengthened', 'undiminished' uncertainty has continued to undermine 'business confidence and dampening investment in Canada's major trading partners'. Of particular note is that BOC explicitly indicated its different from the Fed, attempting to dampen hopes that BOC would follow the Fed in raising interest rates. It also attributed the recent increase in Canadian treasury yields to US factors, instead of domestic fundamentals. We expect BOC to leave the policy rate unchanged, as well as maintaining a dovish tone, throughout 2017.

The accompanying statement is exceptionally brief. On global developments, BOC noted the 'strengthening' in economic conditions. Yet, it added that 'the uncertainty, which has been undermining business confidence and dampening investment in Canada's major trading partners, remains undiminished'. Domestically, policymakers also acknowledged that 'the dynamics of growth are largely as the Bank anticipated'. They also noted the recent pickup in inflation, but attributed the below-expectation improvement to lower food prices. Moreover, they noted that core inflation is being held back by 'persistent economic slack' which is 'offset by that of past exchange rate depreciation, although the latter effect is dissipating'.

The central bank strived to distinguish Canada's situation from the US'. As noted in the statement, 'business investment and non-energy goods exports continue to disappoint. There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States'. Concerning the sharp rise in Canadian yields, BOC judged that it was driven by the market's 'anticipation of fiscal expansion in a US economy that is near full capacity'.

In the concluding paragraph, BOC judged the current monetary stance is 'appropriate'. In our opinion, BOC should likely leave the policy rate unchanged, as well as maintaining a dovish tone, throughout 2017

RBA left the cash rate unchanged at 1.5%, as widely anticipated. Little news was seen in the accompany statement with the more notable change was policymakers' acknowledgement in the rise in commodity prices. However, they stopped short of projecting its impacts on growth, for now. Today's announcement lacks indication for the central bank's monetary policy outlook. We expect future moves remain data-dependent but the central bank is not urgent in making another change in the policy rate.

Prices of coal and iron, along with many other commodities, have been soaring of late. RBA also acknowledged this situation, noting that, 'commodity prices have risen over the course of this year, reflecting both stronger demand and cut-backs in supply in some countries'. As noted in the statement, 'the higher commodity prices have supported a rise in Australia's terms of trade, although they remain much lower than they have been in recent years. The higher prices are providing a boost to national income'.

The central bank continued to expect the global economy to expand at 'a lower than average pace'. On the employment market, it acknowledged that improvement in the advanced economies over the past year. On China, its top trading partner, RBA noted that 'economic conditions in China have steadied, supported by growth in infrastructure and property construction, although medium-term risks to growth remain'. The risks include subdued inflation across the globe. As suggested in the minutes, 'the continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels'.

Concerning domestic economic developments, RBA indicated that 'the economy is continuing its transition following the mining investment boom'. It sees 'some slowing in the year-ended growth rate is likely, before it picks up again'. On the job market, relevant indicators remained 'somewhat mixed'. It noted that while 'the unemployment rate has declined this year', some measures of 'labour underutilisation are little changed'. Policymakers would not be optimisitic over the employment market outlook, noting that 'part-time employment has been growing strongly, but employment growth overall has slowed'.

The paragraph referring to the monetary stance stayed unchanged. As noted, policymakers 'judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time'.

The official manufacturing PMI for China climbed +0.5 point higher to 51.7 in November, another month of big increase after October's 0.8-point gain. The non-manufacturing PMI (services and construction activities) soared +0.7 point to 54.7. The services PMI added +1.1 points to 53.7, while the construction PMI slipped -1.4 points to 61.4. The Caixin/Markit version of manufacturing PMI, by contrast, fell to 50.9 in November from a 27-month high of 51.2 a month ago. Despite the fall, Markit noted that it remains the second-highest reading in 2 years and indicates that 'the manufacturing industry continued to pick up steam'. Moreover, although index readings for both output and new orders declined, those 'tracking input and output prices rose at a faster pace to hit their highest levels in 5 years, pointing to further intensification of inflationary pressure'.

The improvement in the manufacturing sector was broadly based, suggested in the official report. Growth was seen new orders, trade, employment and inflation. According to the National Bureau of Statistics, the 'new orders' index rose to 53.2, from 52.8 in October, whilst the 'production' index gained +0.6 points to 53.9. Concerning foreign trades, the 'export orders' index rebounded to 50.3 from 49.2 in October, and the 'import' index rose to 50.6 from 49.9 previously. On the job market, the 'employment' index added +0.4 point to 49.2 in November. Inflation outlook also improved with the 'input prices' index jumping +5.7 points to 68.3, the highest level since early 2011.

In terms of company size, the PMI for large companies jumped to 53.4 from 52.5, that of medium size companies added +0.2 point to 50.1, whilst that for small size companies fell -0.9 point to 47.4. This suggested that the strong headline reading was mainly driven by large size companies. This was compared with the situation in October when small size companies were taking the lead.

The Caixin/Markit manufacturing index, by contrast, fell in November, with growth in both the 'output' and 'new orders' indices decelerated. The agency remained upbeat on CHina's outlook, though, suggesting that 'the Chinese economy continued to improve in November, although it lost some momentum compared to the previous month'. It added that 'inventory and employment data also showed the foundation of growth is not solid yet and investors have to remain vigilant about the risk of a downturn in coming months'.

To the market's surprise, OPEC announced to cut production to 32.5M bpd, the lower end of the target range indicated in the "Algiers Accord" in September. It also represents a -1.2M bpd, or -3.7%, reduction from October levels. Meanwhile, OPEC noted that non-OPEC countries have also agreed to cut output by -0.6M bpd with half of the contribution coming from Russia. Initial market reaction was buoyant with crude oil prices rallying the highest levels in a month. However, performance of commodity currencies under our coverage was not as robust as expected. Indeed, all of aussie, kiwi and loonie ended the day lower after initial rally, mainly due to a stronger US dollar. Higher oil prices as a result of output cut lift inflation expectations, lifting US dollar and Treasury yields.

Details of OPEC Agreement

Agreeing to cut output for the first time in 8 years, OPEC announced it would reduce output by about -1.2M bpd by January, making the aggregate production of the organization to 32.5M bpd, the lower end of the target range suggested in September. Saudi Arabia, the biggest producer in OPEC, would bear the biggest reduction and lower its output by -0.49M bpd to 10.06M bpd. Nigeria, Libya and Indonesia (OPEC membership suspended) are exempted from the plan, while Iran is allowed to produce at a maximum of 3.8M bpd. Iraq, however, is given its first quota since the 1990s and would cut output by -0.21M bpd from October level to 4.35M bpd.

Meanwhile, non-OPEC producers also agreed to lower output by -0.6M bpd with Russia saying it would cut by as much as -0.3M bpd "conditional on its technical abilities". Other non-OPEC countries deemed to participate include Oman, Azerbaijan, and Mexico. A deal would be formalized on December 9.

The plan would take effect on January 1, 2017 and is scheduled to last for 6 months initially. A monitoring committee will be established to monitor the implementation and compliance of the agreement. OPEC and non-OPEC producers would meet on May 25 to discuss whether to extend the plan for 6 more months.

Uncertainty Remains

The market apparently welcomes the deal, exemplified in the rally in oil prices and energy shares. However, uncertainties remain. Indeed, execution of the plan is challenging, given OPEC's notorious track record of exceeding output quotas. The plan is scheduled to last for 6 months with the option to extend for 6 more months. There is the possibility that production can return to October levels or above after the period. All these would increase the difficulty of rebalancing the demand/supply outlook.

Note that the plan only deals with production, not exports. With the plan effective in January 2017, OPEC producers might be tempted to increase production in December. This could raise inventory for future exports. Indeed, Saudi's "compromise" to cut might only be driven by the temporary drop in demand and local refinery maintenance. Yet, exports have stayed at elevated levels. In September, the Kingdom's oil exports rose to 7.81M bpd, the second highest level. It is expected that Saudi's inventory would allow it to maintain exports of over 7.6M bpd in the coming year. In this case, we doubt if oil prices could rise meaningfully due to the so-called output cut deal.

Saudi Arabia's Exports Rose to Second Highest on Record in September

Concerning non-OPEC producers, Russia is expected to reduce output but as much as 0.3M bpd next year. However, given the fact that the country has been producing at record levels over the past several months, a cut would mean a return to the still-elevated levels seen last year. The US has not participated in the deal. It has long been OPEC's concern that US would ramp up production if oil prices return sustainably to US$50/bbl or above. There is a high likelihood of an increase in shale investment, should oil prices rise to US$55-60/bbl.