‘As flows the oil, so does prosperity’ an old axiom where the flipside couldn’t be more true today.
Yesterday, Russia refused to join oil production cuts with Opec; Saudi Arabia in reply have decided to launch into a price war. Oil prices have dropped 22% this morning as a result. The very political success or failure of any country and the survival of its citizens is directly affected by controlling the price of oil. An oil price war could have huge geo-political and economic affects.
This on its own would drive volatility in the currency markets; let alone in an economy condemned to spiralling coronavirus uncertainty. A current climate which has drove the US Fed to do something that it hasn’t done since the 2008 financial crash. After Jerome Powell has ‘come to the view that that is time for us to act in the support of the economy’ the Fed have cut rates by 50bps.
In the US, cases and deaths due to Coronavirus have risen. In Italy, cases and deaths also shot up, its tolls only second to China, and the entire Lombardy area has been locked down. The health minister in France announced a ban on gatherings of more than 1,000 people.
The most worrying of data conveying the economic impact on the economy comes from China; the largest trade deficit in 16 years in February. Exports fell 17.2% on-year which marked the biggest drop in 4 years. Surveys suggest a big hit awaits in the US and Europe. Amidst the continuing spread and rising fear, on Friday we saw global equities take another sharp hit; Stocks across the board dropping 5 % with the Dow dropping 250 points.
An oil price war coupled with the continual spread of the covt-19, have resulted in currencies that have little room for cutting interest rates strengthening across the board, more specifically the EUR, JPY and CHF. Markets are pricing in a 75-basis point rate cut by the Federal Reserve next week. As a result, EUR/USD is trading above 1.14 after nearing 1.15, the highest since January 2019; a significant rise seeing as the pair was below 1.08 just 3 weeks ago. GBP/USD has surged above 1.31, 5-week highs.
Over to the pound, there is still room for 75 bps of rate cuts for the BOE and as a result speculation of monetary stimulus is on the rise. These factors are still outweighing the worsening Brexit talks with Michel Barnier, Chief EU Negotiator, who has said ‘there are many disagreements’ and expressed pessimism on arriving before year-end.
These knee jerk moves overnight in Currencies have been beneficial for GBP and therefore showing excellent levels for the import community. GBP against the commodity currencies like the AUD, NZD and CAD showing large moves. This could be a great time to now look at short and medium-term hedging programming in most GBP crosses.
At the time of writing:
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