Collapse in oil leading commodity currencies lower

The domino effect of crashing oil prices continued to send commodity currencies lower during trading on Tuesday. One major mover was the USDRUB, with the pair rallying to a level not seen since the infamous Central Bank of Russia (CBR) overnight 6.5% interest rate rise. With the economic environment being so heavily against Russia at the moment, the Rouble weakness is coming as no surprise. Russia is highly reliant on oil exports and with oil prices yet to find any floor, the CBR will continue to face a tough task of strengthening the currency. Bearing in mind Russia is also approaching what appears to be an inevitable recession, the CBR’s task to defend the Rouble from weakening is likely to become even tougher.

The knock-on effect of collapsing oil prices has not been limited to just Rouble weakness by any means, with the USDCAD arriving to a fresh 5.5 year high at 1.2006. This pair has flown like a rocket since the Royal Bank of Canada (RBC) confirmed in late November that the decline in oil would be negative for the Canadian economy. These comments basically just provided a green light for the USDCAD bulls to charge full steam ahead. The interesting factor is that oil exports are reported to represent just over 20% of the Canadian economy, which is far less than other oil-exporting economies.

The Norwegian Kroner also weakened close to levels not seen since the unexpected interest rate cut from the Norges Bank late last year, with the USDNOK moving as high as 7.7658. Not only is the Norwegian economy largely expected to be impacted by the free-falling oil prices, but the surprise Services PMI decline for December has furthered the weaker economic landscape for Norway. There may be a further interest rate cut to come from Norway, possibly even next month.

Regarding oil, the value of both Brent ($46.38) and Crude ($44.17) have continued to record new lows. Reports over there being a supply surplus of 2 million barrels of oil a day has just further weighed in the bears’ favour, and there was already an over-powering supply and demand equation supporting the bears anyway. The early morning news from the World Bank that global economic growth forecasts have been lowered will also lead to suspicions that there is going to be even less demand for the commodity, which is just stacking the odds further for the bears and largely explains why the oil markets have already lost a further $1 in the early morning hours.

After opening trading on Tuesday at 1.5170, the GBPUSD dropped 170 pips to as low as 1.5077 following the lowest UK inflation reading since May 2000. UK inflation at an annualised 0.5% just added further negative GBP sentiment to a currency that was already suffering from a complete lack of investor attraction. The Bank of England’s (BoE) already firm views on weak inflation have now become even more entrenched, which is going to further delay even the most optimistic of expectations for a UK interest rate rise. The GBPUSD managed to recover some losses following BoE Governor Mark Carney confirming that BoE will not be easing monetary policy, with the market reaction being slightly surprising because he repeated the same message late last year.

Nonetheless, what the inflation reading has done is to alert the markets to a potential deflation threat next month because the oil prices have yet to even find a floor. With GBPUSD upside potential mainly being limited to USD profit-taking this adds to the viewpoint that the negative GBP sentiment will continue for some time, with the currencies lack of attraction weighing on investor sentiment.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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