London Open: The commodity bloc wobbles as oil slides again

Market Analysis / 5 Min Read
Stephen Innes / 15 Apr 2020

London Open 

 

Is oil shaking the trees again?

 

Currency markets and particularly the commodity bloc of currencies are getting a bit antsy with oil prices falling again as the OPEC ++ deal in its current format sorely disappointed relative to market expectations even if executed to the letter. But even more worrisome is that it failed to address the immediate structural oversupply, leaving oil prices vulnerable, especially with even the most bullish oil traders worried about backing the wrong horse at current levels. Markets believe the deal won't come close to offsetting demand devastation and isn't even large enough to eat into what's in storage.

 

The Australian dollar struggled for traction today as profit-taking set in as the PBoC rate cuts failed to inspire as commodities have been unable to fire higher and are falling as Oil prices continue to wallow in a thickening sea of oil.

 

Given this is a bit of a contrarian view, I'm more than prepared for the fact that AUDUSD 6450 is going to be a tough nut to crack. Which suggests there will be excellent opportunities to fade short term Aussie moves higher even if you're as bullish Aussie as I'm. AS oil continues to remain a thorn in the commodity blocks side 

 

Markets 

 

Policy support is still a pretty dominant theme in the markets. Still, the easing of social distancing restrictions is top of mind after all this is crucial in meeting market expectations for a rebound in economic activity. As virus curves continue to flatten, attention turns to when lockdowns can end. At the moment, evidence suggests that governments will continue to tread carefully until otherwise confirmed. But even if the governments ok an exit from hibernation, things will open up gradually to ensure hospital capacity stays available, and at least there's a clear indication no secondary spreader. So any thought of a substantial pent up demand supporting the economy out of the lockdown gates might be but a pipe dream at this stage, and the market will probably start to L, U, V ... W no, its not a love letter but a more sensible expectation of how the economy emerges from Covid 19.

 

There's going to be enormous amounts of pressure on the government to get this right suggesting that lockdown extends as the last thing anyone needs is confusing messaging from government leaders. Hopefully, the political decision balancing public health advice again economic consideration is correct.

 

Leaders across Europe weighed steps to exit quarantines, with Denmark set to reopen daycare centers and primary schools. Spain, Germany, and Italy all reported fewer infections, suggesting the crisis continues to ease. It's these kinds of headlines that traders are paying attention to rather than what bad data seem to suggest or that the IMF predicts the "Great Lockdown" recession would be the steepest in almost a century.

 

But one thing that is crystal clear is weak incoming data are certainly not denting risk sentiment as credit, and equity markets take solace in the staggering amount of stimulus that has been thrown at the left hand of the V curve. It's 2009 all over again, where bad news equals good news for markets on the back of increased policy support expectations."

 

PBoC tried but failed to surprise but A for effort.

 

The People's Bank of China might have tired to surprise the market by possibly pulling a page out of the Fed handbook while proactively cutting interest rates ahead of a potential data heat spot like Friday's GDP data. Not sure if this is ominous or not. But the China bounce remains alive and well as evidence emerges, the ground hasn't cratered entirely after yesterday's trade data.

 

But none the less it does anchor expectations to guide market interest rates lower. USDCNH tried lower before the open following the weaker dollar overnight but bounced over 100 pips + on the MLF rate cut. Given the markets PBoC's dovish lean, I expect USDCNH to track the broader dollar, but CNH could underperform the basket over the near term. Ultimately, I see the USDCNH challenging 7.00 during the next 10-20 trading session as the Chinese economy lights up ahead of the rest of the world. The upcoming tax payment season and massive special-purpose debts planned will test the lower interest rates trajectory, I'm sure. 

 

The HKMA last Thursday said it would reduce the issuance of Exchange Fund Bills, effective next week. The issue size of EFBs will be decreased by HKD20 bn in the next four weeks, by HKD5 bn each on April 21, April 28, May 5 and May 12. This should automatically boost the aggregate balance and push USDHKD points lower. But with more interbank traders working from home, banks would rather stay long HKD cash in case of market disruption as they won't be able to square their HKD shorts in time. 

 

India relaxing lockdowns

 

India is said to allow factories in rural areas to reopen from April 20, as well as port operation and cargo movement via air transport, Bloomberg reports. India is gradually opening up, but it's a consumption-based economy, and consumers/households will be under lockdown for another 19 days. Maybe a bit early to chase the USDINR lower amid persistent bond outflows.

 

Currency Analysts

 

One of the oddities I've always found about Commonwealth Currency analysts is how bearish they continuously are on the home currency. Now I thought growing up on Bay Street that Canadian bank analysts were bearish on the CAD, but these days they pale in comparison to the ones that hang around Martins Place AUD.

 

It's like a tunnel vision where the only focus on the ills of the domestic landscape without realizing you need to cross this currency with another economy. So, while the long Aussie might not be for everyone as its certainly one of the riskiest, but from that perspective, it probably on of the cleanest dirties shirts in the laundry with China's engines revving back up.

 

 But the big question that should be on everyone's mind is not their domestic economies but rather has risk jumped the gun, suggesting that if it has the US dollar demand will come back with a vengeance. 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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