Crude Bounces on Central Bank Easing


Crude oil prices recovered during the past week and was buoyed by central bank activity that helped buoy riskier assets. Despite stronger than expected inventory builds in the U.S., petroleum markets benefited from stimulus from the Peoples Bank of China and the treat of additional monetary stimulus from the European Central Bank.

On Friday, China’s Peoples Bank of China unexpectedly cut interest rates, shocking the market by slashing one-year lending rate by 40 basis points and the one-year deposit rate by 25 basis points. The move has a similar shock impact as the Bank of Japans unexpected expansion of its QE program, which shocked the market last month, and likely reflects Chinese policymakers’ determination to keep growth above 7.0% year over year.

The news of the Chinese rate cut boosted global equity bourses, and helped commodities gain traction. Dovish comments by Draghi and the beginning of the ECB’s asset backed purchase program also helped energy prices gain traction.

ECB started ABS purchases. After publishing the legal act on the ABS purchase program Thursday, the ECB said today that it started purchases of Asset Backed Securities Friday. There were no details on the amount or focus of purchases. Many feel that the current restriction to ABS and covered bonds will make it difficult for the central bank to reach its goal of bringing the balance sheet back to levels seen at the beginning of 2012 and will eventually have to widen the program and start purchasing sovereign bonds.

The technical picture on a weekly basis shows that oil prices are oversold. The relative strength index (RSI) is printing a reading of 22, which is well below the oversold trigger level of 30. This is the lowest weekly RSI reading seen since the prior week, and prior to that back nearly 5-years. Prices were unable to make a lower low, and therefore are likely to test short term resistance near the October highs at $88.

The post Crude Bounces on Central Bank Easing appeared first on Forex Circles.

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