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Are petro-currencies in for a slippery ride?

Publication Date: 12 Nov 2018 - By ReachX Team By ReachX Team
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FX & Rates Macro FX Global

The most important move last week (5-11 November) was not in foreign exchange rates, but in oil prices, after the Brent front-month futures contract - considered the global proxy benchmark - briefly dropped below $70 per barrel. 

Overall, it saw a drop of over 4% that was slightly smaller than the 5% drop noted stateside in the West Texas Intermediate (WTI) contract’s slide. It all bodes ill for petro-currencies, says Kit Juckes, Head of FX at Société Générale. 

(Source: SocGen)

In a note to clients, Juckes said NOK and CAD are the softest of the G10 currencies following upheaval in the oil market, although concerns about NAFTA and a downside Norwegian inflation surprise also helped. 

“RUB is the weakest of the CEEMEA currencies, and elsewhere MXN and MYR are weaker too, with oil to blame for much of this. Away from this, the main driver was a recovery in risk sentiment after the US Mid-term elections that saw the S&P 500 gain 3% on Monday-Thursday. So risk on with a sour aftertaste,” the SocGen analyst added.

NZD and AUD are stronger in the process, JPY softer, Juckes noted further. “EUR/USD is meandering in the bottom half of its 1.13-1.18 range, doing nothing and still vulnerable to a break. SEK has outperformed NOK and EUR on hawkish Riksbank comments and GBP is helped by hopes of a Brexit deal, though optimism on the score is already fading, too.”

In CEEMEA, SocGen noted small moves, with the exception of the soft RUB. “EUR/PLN is drifting down in a 4.25-4.35 range that has held since the summer. ZAR and ILS have been held up against the euro by the dollar more than anything else,” Juckes said. 

The IDR was the biggest Asian winner, helped by strong growth data and the introduction of a domestic non-deliverable forward market that increases demand for the Indonesian currency, but the rest of the Asian currencies have drifted a little lower, despite hopes of a US-China breakthrough trade deal. 

“The weakness of [particularly Chinese] equity markets has dampened sentiment significantly. MYR was the worst performer, dragged down by monetary policy divergence with the US. In Latam, the Bolsonara election rally is reversing as the week progresses, and oil prices don't help. MXN is the worst of the LatAm currencies as the decision to cancel the new airport continues to weigh,” Juckes concluded.

 

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