The foreign exchange markets have commenced trading with currencies attempting to modestly recover losses after suffering punishment following another surge in USD strength over the previous week. Moving away from currencies, the major headline attraction has been WTI Crude falling to a new six-year low at $43.80. In just over a week, the price of WTI Crude has declined by nearly $10. However, this shouldn’t have really surprised anyone because the rally seen last month was always at risk of a serious pullback at some stage, largely because the oversupply concerns that inspired the dramatic decline in the price of oil in the first place have not gone anywhere. If anything, the oversupply in the market has risen even further this year, and there remains way too much supply for what there is in demand for the commodity.
I still do not think that the decline in WTI Crude has concluded, and we are approaching the $42 area that if prices extend below, could potentially send serious shockwaves throughout the financial markets. Recording a new milestone low this morning does point towards the picture that the bears are gearing up to steal the spotlight once again, and you just have to look at the comments from the International Energy Agency (IEA) late last week to see that the bears still have enough ammunition to push prices even lower.
The IEA basically hinted that there is probably more pain to come, while also highlighting that continual growth in US inventories is showing no signs of slowing down. What could further inspire the bears to take control is that not only is the relentless growth in US inventories repeatedly weighing on oversupply concerns, but that there is also at least another two months until the next OPEC meeting. Prices are now another $30 lower than the last time OPEC met, therefore I would expect us to be far closer to agreeing on a supply cut than we were last time. There is probably still some optimism as well that the drop in US rig counts noticed regularly since late January will eventually lead to lower US inventories. In the meantime, it appears that the oil markets will face a challenging couple of months before prices potentially rebound around Q3.
When I think towards the possibility of even lower oil prices, I also consider what further suffering this could cause currencies linked to lower oil prices and wonder whether the Central Bank of Russia (CBR) is feeling concerned. The Ruble was finally showing signs of stabilization, which only days ago provided the CBR with enough confidence to begin cutting interest rates to a more normal level – and then WTI Crude slips to a new six-year low. The aggressive decline in WTI Crude could really threaten the period of stabilization the Ruble was showcasing and I will be watching this closely over the next couple of days. As far as I am concerned, the $42 area is the one to look out for in WTI Crude and if we do slip below this range then we can expect some extra fireworks to be added to the already-high excitement in the currency markets.
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Gold is continuing to consolidate around the $1160 area that was highlighted last week, although I do wonder if the suffering in WTI Crude will lead to a correlation in the Gold markets. For now though, Gold traders will be focusing on Wednesday’s FOMC statement and this will likely be the main driver behind which direction Gold moves in next. Anticipation is high that the Fed might remove the word “patience” from its statement on when it can raise rates and if this did occur, I would expect Gold to slip towards its 2014 low around $1131. Personally, I find it more likely that the overall tone will remain that the Fed is in no hurry to begin raising interest rates and in this case, Gold would probably strengthen.
The Cable is attempting to bounce higher and make an entrance to 1.48 after being punched heavily last week. It was mentioned that the Cable had not “bottomed out” and would find its feet in the 1.40’s, but to be honest I wasn’t expecting it quite so soon. The Cable decline is just another example of a move in the FX market happening much sooner than expected, which is also the very same theme for the USDCHF and EURUSD. The UK markets are really starting to concentrate on the upcoming UK election, and the preliminary poll released over the weekend provided validity to suggestions that the election race will be incredibly close.
It wouldn’t surprise me if after a small consolidation, investors continue to close positions rather than risk a repeated of the unexpected volatility that occurred with the Scottish Referendum last September. Personally, I am expecting the Cable to fall to 1.43 before the election concludes.
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