The collapse of energy prices continues with the West Texas Intermediate (WTI) now trading below $65 and Brent below $69 for January delivery. Not surprisingly oil exposed currencies are under severe pressure this morning, with worse surely to come. Here’s what we see:
- The Russian rouble at record lows versus the US dollar at USDRUB52.30, it was around USDRUB36 back in August a 45% depreciation in just 3 months! Not since 2008 have we seen moves like this in a major currency
- The Canadian dollar is at its weakest level since 2009 and threatening to weaken further
- The Nigerian naira has fallen by 2.4% today versus the dollar to USDNGN183 this morning!! It’s worth noting that oil prices are over 10% weaker since the Central Bank of Nigeria effectively devalued. If their strategy was based on oil prices stabilising at those levels, they will need to reassess in the very near future.
- The Mexican peso is at its weakest since 2012, and appears to have broken some key technical levels in the last month. The potential for ugliness in that chart is clear for all to see
I could go on, but I suspect you get the point! The strategic decision (I choose to believe the 2nd option I mentioned in a previous blog… OPEC is trying to eliminate the highest cost Shale oil producers in the US, and also set back any plans for fracking in other parts of the world) by OPEC to maintain current production is reverberating through the energy complex. It is immediately obvious that many economies that depend heavily on oil production will be adversely impacted by these events, but as I’ve said before, I grow increasingly bullish about the energy consumers particularly in Europe and Asia. This is a substantial tax cut (equivalent) that will go straight to beleaguered consumers, and we should see the evidence next year. This is disinflation people… but I fear central banks may take the irresponsible path and cry deflation. I’ve said it before, and I’ll say it again… interest rates have got to be raised. There are individuals and businesses out there who are borrowing at super-low rates that will not sustain. When loan rates go up they will be in serious trouble. It’s not their fault they are being given distorted signals about where the level of interest (the cost of money if you will) is…it’s the central banks. If they wait too long it will be a disaster.
Moves like we’ve seen in the energy complex are likely to infect other commodity markets, so it’s not just oil exposed currencies we need to watch for. I would not be surprised to see NZD, ZAR, AUD as well as many others come under pressure in the weeks and months ahead. This really is a major event which alters the picture for the global economy over the next few months, and even years.
Manufacturing PMI came out for the Eurozone a short while ago, it was slightly weaker than expected but not dramatically so. We will see PMI’s in the UK a bit later and also for the US this afternoon. Once we get all that data we will have a more informed view of the relative performance of major economies and the likely implications for currencies. As I’ve mentioned in recent blogs, the dollar has appeared to be in a holding pattern, as it consolidates within a trend. I increasingly suspect that we are closer to the end of this consolidation and we should see currency pairs like EUR/USD and GBP/USD attempt new lows. We will alert you when we see the appropriate technical signals.
Finally the Swiss voted, and they rejected the referendum to require the SNB to purchase gold. This is surely a huge relief for the central bank and affords them all the flexibility they need to handle the strong demand for Swiss francs we’ve seen over the last few years. I can’t help feeling a little sad. A central bank keeping more reserves in gold.. Von Mises would have smiled!