December roundup: Oil prices crash, shocking currency markets

The events in December 2014 made market history. Oil prices crashed, falling to below $60 a barrel from previous levels of $90-$110. Following OPEC’s announcement that it would not cut supply, the fall in the price of oil was epic.

Jameel Ahmad, Chief Market Analyst at Forextime Limited, comments: “We’re definitely at a point where central banks of emerging market currencies are reacting to strengthen their currencies in response to what many see as a crash in the price of oil, but OPEC’s decision not to cut production essentially confirmed the speculated bearish longer-term outlook for oil, and traders rushed to price the move in as soon as possible. However one might be hesitant to state that the fall in oil prices are a crash just yet, simply because there is still potential for oil prices to fall further. The Federal Reserve will not be delaying US rate rises due to the fall in oil, with concerns over the global economic recovery unlikely to go away either. This will lead to less demand for oil and even further fears over there being an oversupply in the market. A combination of these factors will pressure the oil markets further. If Crude pulls below $53, we are looking at even further bearish moves for the commodity, so watch this space.”

As always in a market crash, the domino effect started, impacting currencies and other assets linked to oil. The first currency to feel a real squeeze was Russia’s Ruble, which fell against its peers due to the market’s belief that a lower oil price would mean a weaker Russian economy. Russia’s reaction was to raise interest rates to increase the currency’s value on international markets and the USDRUB became a hotly-traded pair in December. Nonetheless, the overall trend was a drop in the Ruble against the USD.

“The Ruble was by far the most fascinating currency to monitor throughout December, with a mixture between economic conditions being aggressively against the Russian economy leading to a crumbling Ruble and the Russian Central Bank (RCB) making various attempts to strengthen the Ruble encouraging a supercharge in Ruble volatility. On the morning of Tuesday the 16th December, the RCB unexpectedly raised interest rates from 10.5% to 17% only one week after previously raising rates and this led to a sense of panic from investors. The rate hike was a supposed attempt to not only strengthen the Ruble but also encourage investors to leave cash in Russian banks, but the move backfired. The USDRUB appreciated by over 20% in just one afternoon, with the Ruble weakening to nearly 80 against the USD for the first time in history,” said Ahmad.

The fall in oil prices didn’t only affect Russia though. Oil-producing nation Canada saw its currency – the CAD – slide against its peers, including the USD.

“The CAD had also been gradually declining in accordance with the drop in oil prices, but this move intensified in early December when the Bank of Canada confirmed that the lower oil prices would indeed be negative for the economy. This all but confirmed to traders that not only will the Bank of Canada continue to refuse pressure to begin raising interest rates, but future GDP readings will also be detrimentally impacted by the decline in the price of oil. Previously the USDCAD had faced tough resistance around 1.1456 but the pair breezed through this level after the comments from the BoC and reached as high as 1.1672 on the 15th December.”

So what about the impact on the Euro? It’s no secret that 2014 has been a rough year for the Euro – so is this drop in oil prices good or bad news? The markets are uneasy with the low levels of inflation and growth in the Eurozone, so on the one hand, the drop in oil prices could add to deflation fears. On the other hand, the trend could boost Europe’s struggling economies with cheaper fuel prices, making each Euro go further in terms of buying power.

In Africa, Nigeria’s central bank decided to devalue the Naira in the weeks leading up to December’s crash, possibly preventing an uncontrolled slide in the oil-producing nation’s currency.

Looking at the impact on emerging markets, Ahmad comments: “Emerging currencies are famously vulnerable to volatility, so I am keeping an eye out for shocks to these currencies. As the US Federal Reserve concluded QE in late 2014, it was expected that the USD would strengthen against the emerging market currencies. However, not many expected the oil prices to drop as suddenly as they did and this has led to increased anxiety over what impact this will have on emerging market currencies. It should also be remembered that in the second half of next year the Federal Reserve will begin raising US interest rates, which will further pressure emerging market currencies.”

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