The price of crude oil fell dramatically yesterday, with the near Brent contract down 4.4% at the close, and as much 5.6% intra-day. The most likely cause in my view is the market is starting to discount Iran reaching a nuclear deal with the west. Once that happens, it becomes easier for Iran to normalise relations with the west – another feather in President Obama’s cap – and an opportunity for the country to start exporting oil again. This would be huge as Iran was always one of the larger OPEC producers, so much additional supply will naturally impact the demand-supply dynamics of the black gold. I am rather more sceptical about laying the blame for this move on the Greek crisis, it doesn’t strike me that oil was a particularly popular risk asset, it wouldn’t make sense to deleverage oil holdings on the back of the crisis. We will move on to the Greek crisis in a bit, but it is worth noting that this bearish oil move was due. As I mentioned earlier on in the year, the bounce in the price of crude oil was corrective, and the downward trend and a possible test of the lows was very likely. I believe this is what we are seeing, and this will have implications for commodity exposed currencies, particularly the currencies of oil producers – Russian rouble, Kazakhstani Tenge, Nigerian naira and Mexican peso to name a few. The chances of these currencies coming under pressure if this bearish move persists has unquestionably risen. I will monitor the situation closely going forward.
Yesterday we saw solid ISM data published for the non-manufacturing sector in the United States, although the employment component was indifferent. Overall the data was encouraging, and it is further evidence of the sustained strength of the American economy. Other data that came out yesterday pointed to a continued and strengthening recovery in Spain (Mr Tsipras are you watching?), and somewhat less inspiring factory orders data out of Germany. Overnight the Reserve Bank of Australia kept rates on hold, which was as expected, and we have already seen industrial production data published in Germany which backs up the somewhat stagnating factory orders data we saw yesterday. Later on today we get industrial production data in Britain, as well as the NIESR GDP estimate for the UK. And perhaps most importantly there will be yet another Eurogroup meeting as well. I believe that the message from the financial markets is that the Greek crisis is fairly well discounted already, but there is still a risk of heightened volatility as we are exhausting the known unknowns, and moving towards unknown unknowns, if you will excuse my Rumsfeldian speak. It is notable that equity markets which were close to support levels bounced fairly aggressively yesterday, and look to be off to a good start today. It is no surprise that there is some gentle dollar strengthening that is occurring in sympathy with the mild risk on tone in the equity markets. That is as it should be, given the paradigm we have observed over the past year.
That leads us nicely on to Greece. When Merkel and Hollande met yesterday, they clearly stated that the ball is in the Greek court. Perhaps they have made the right first step with the resignation of the rather hardline leftist Finance Minister, but I would imagine that there are pretty severe trust issues now. I’m not sure there is anything the Greeks can propose that will be trusted by the more conservative northern European members of the Eurozone. Agreement is one thing, but implementation is quite another. No one really believes that agreements will be adhered to by the Tsipras government, and worse still no one is sure they have the experience or competence to effectively manage the situation on the ground. It promises to be a difficult few days of negotiations, but the odds of Grexit are rising. Make no mistake, financial counterparts are already starting to speculate about what a new Greek currency would look like. This is all well and good, the key point is that there is no panic at the moment. Best we can hope for, and on that basis we continue to look for a strengthening of the US dollar across the board, new lows in EUR/GBP are likely, and there is a risk that commodity exposed currencies will start to underperform the lot.
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