COMMODITY CURRENCIES REBOUND WITH CRUDE OIL PRICES

  • We expect crude oil prices to continue to climb higher in response to months of almost no investments in oil and gas
  • Considering new USD weakness, the Aussie is rising the most against the greenback above 0,72, nonetheless further Aussie weakness cannot be ruled out just yet as iron ore will continue to adjust prices to the downside
  • The New Zealand dollar was also better bid after the country’s trade surplus surprised massively to the upside
  • We continue to expect the single currency to reverse momentum, especially against the USD after Eurozone finance minister and the IMF secured a deal on the Greek debt early this morning
  • BoJ Governor Kuroda confirmed that further stimulus will be added “without hesitation” if the yen strengthens too much and threatens the country’s objective of reaching the BoJ’s inflation target of 2%
  • We believe that 106/107 yen for a single dollar note may be the price to call for a BoJ intervention
  • Fresh stimulus should be added today as there is already massive downside pressure on inflation
  • Unfortunately for Japan, the US economy is also suffering and bearish pressures on the USD/JPY will soon be back before the BoJ will be forced to intervene in a never-ending monetary policy

Crude oil extended gains in New York yesterday as an easing supply glut takes the front stage after months of oversupply worries. The US gauge, the West Texas intermediate, rose as high as $49.35 a barrel, while the international gauge, the Brent crude, tested the $49.26 threshold. We expect crude oil prices to continue to climb higher in response to months of almost no investment in oil and gas. It will take an extended period of time to return to normal, which would favour further crude oil strength.

In the FX market, the US dollar wiped out yesterday’s gains with the dollar index, falling 0.20% to 95.48 after hitting 95.78. Among the G10 complex, the Australian dollar rose the most against the US dollar, rising 0.30% and returning above the 0.72 threshold. Over the past few weeks, the Aussie suffered from a strengthening US, bolstered by increasing Fed rate hike expectations but also enhanced by the collapse of iron ore prices. Indeed, the most liquid future contracts on the Dalian commodity exchange are down more than 30% since the end of April as it slid from roughly 500 CNY/metric tons to 342 CNY/metric tons this morning. Further weakness of the Australian cannot be ruled out as we anticipate iron ore prices to continue to adjust to the downside; however we also expect the greenback to reverse momentum as the market will start to price out a June rate hike, which would provide support to AUD/USD.

The New Zealand dollar, was also better bid after the country’s trade surplus surprised massively to the upside. Exports rose to NZ$4.30bn, beating expectations of NZ$4.08bn and previous month’s reading of NZ$4.20. Simultaneously, imports rose NZ$4.01bn versus NZ$3.98bn median forecast, unchanged compared to March’s data. All in all, the trade surplus printed at NZ$292mn versus NZ$25mn consensus, while the previous month’s reading was upwardly revised to NZ$189mn from NZ$117mn first estimate. NZD/USD surged 0.18% in Tokyo, hitting 0.6764.

EUR/USD remained under pressure as it failed to clearly  reverse the negative momentum in spite of the dollar rally that is losing steam. The currency pair tested the 1.1144 support (low from March 24th) but was able to hold ground above it. We continue to expect the single currency to reverse momentum, especially against the USD, all the more so as the Eurozone finance minister and the IMF secured a deal on the Greek debt early this morning. It should therefore allow financial markets to spend a relaxing summer, free of Greek worries. The market will now focus on the Brexit story, however, according to the latest polls, a Brexit is almost off the table.

Yann Quelenn, market analyst: “Kuroda ready to act, once again: BoJ Governor Kuroda, in a speech held at the Japan parliament this Wednesday, confirmed that further stimulus will be added “without hesitation” if the yen strengthens too much. Indeed, he said that it would threaten the country’s objective of reaching the BoJ’s inflation target of 2% over the medium-term.

For the time being, financial markets do not know which price will trigger an intervention from the BoJ. Yet we believe that this trigger is not very far away from current prices and should lie around 106/107 yen for a single dollar note. Nonetheless, we feel that the BoJ will likely try to avoid any more stimulus and that the price of the yen is only a central bank indicator at which the situation is not sustainable. From our vantage point Kuroda’s declaration was a simple verbal intervention. We do not believe that Japan is satisfied with heaping on even more stimulus.

Supporting our view, most recent CPI data printed at -0.3% y/y so following Kuroda’s comments, fresh stimulus should be added today as there are already massive downside pressures on inflation. However it is true that the JPY is taking a small breath against the US dollar on renewed likelihood of a June Fed rate hike. Unfortunately for Japan those hopes won’t last long, US economy is also suffering,  and bearish pressures on the USD/JPY will soon be back before the BoJ will be forced to intervene in a never-ending monetary policy.”

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