Oil extends bounce, slamming USD

<p>Before addressing the overnight rate cut from the RBA and the outlook for the Aussie, it is worth mentioning the day’s violent price action, which […]</p>

Before addressing the overnight rate cut from the RBA and the outlook for the Aussie, it is worth mentioning the day’s violent price action, which was initiated by the 8% rebound in oil prices, leading the way for four straight daily gains, something not seen since June. The oil rally initially triggered broad gains in the energy currencies of Canada, Norway, Sweden and Mexico, with USDCAD plummeting 250 pips or 2.4%, and even the Aussie, which collapsed by nearly 200-pips or 3% against the USD following the RBA rate cut has recovered all of its post-RBA decline.

The euro joined rallying energy FX on an MNI story that Greece would offer bridge finance to plan to the EU. We do not put much credence in chatter that the Greek government is considering to buy bank shares in exchange for debt in a deal that would cover €41 bn of the bank bailout.

As rallying oil prices lifted gas/oil shares around the world, equity indices followed through at the expense of USD and gold. The yen also joined the selloff among safe haven currencies.

US Crude Feb 3

Aussie decline still not good enough for RBA

Unlike the Bank of Canada, which focused on downgrading growth and inflation forecasts in its rate cut announcement, the RBA took the liberty of explicitly talking down the Aussie as RBA Governor Stevens noted “…weaker currency will probably be needed to achieve balanced growth in the economy.”

The RBA added: “The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy”.

Although AUDUSD fell 28% and 20% from its 2013 and 2014 high, the declines compare to a more modest decline by the RBA’s Aussie trade-weighted index of 20% and 13% from the 2013 and 2014 highs and the 15% and 13% declines in AUDJPY over the same periods.

The RBA statement left open the door for at least two more rate cuts of 25 bps in H2, while concerns about an overheated housing market will likely be addressed via macroprudential policies. As the RBA is well aware with the challenges of excessive rate cuts, it will most likely opt for the option of continuous jawboning of its currency.

The probability of another 25-bp cut at the RBA’s March 2nd meeting will depend on the extent of falling inflation momentum and the increase in unemployment. Never has the RBA been granted policy independence 20 years ago eased policy rates after holding them unchanged for as long as 18 months following a series of rate cuts. The resumption of interest rate cuts combined with new 50-year lows affirms the end of the commodities supercycle.

Aussie’s cyclical bottoms

As the RBA reminds of its trade-weighted index being the currency of choice, a look at the 7-8 cyclicality of AUD-TWI bottoms suggests another 12 months of declines in the index. This may well translate into another 7-8% decline in AUDUSD towards the 0.70 territory and 85 against the yen.


UK’s Positive double whammy

It’s been a positive double whammy for the FTSE-100 and sterling so far this week as UK construction PMI rose to 59.1 in January, exceeding expectations of a 57.0 print, following December’s 58.6. The January figure broke three months of declines and emerges one day after Monday’s release of the January manufacturing PMI, which rose to 53.0 from 2.7 in December. FTSE’s gas & oil members are boosted by the 4th consecutive rise in Brent oil, the longest winning streak since June, hitting a 4-week high of $57.23. As oil resumes its rebound, the inevitable question on whether FTSE-100 can reclaim the 6,950 high of December 1999.


Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.