Oil Prices Plunge: Crude crumbles while Brent breaks below $72

The overwhelming majority of market attention on Thursday was directed on the OPEC meeting, where a decision was made not to cut Oil production. As Thursday progressed, speculation intensified that OPEC that this would be the decision, which led to the Oil markets facing intense pressure throughout the day. The price of Crude crumbled by around $6 and fell from $74.51 to as low as $67.72, while Brent broke away from $77.54 to extend below $72 for the first time in over four years. In the early hours of Friday morning, the Oil markets are continuing to withstand pressure, with the OPEC decision confirming the longer-term bearish outlook and investors rushing to price this move in as early as possible.

In line with expectations, the currencies that are impacted from declining commodity prices were the ones that really felt the pinch following the decision. In particular, the Russian ruble was flattened and has since weakened from $46.20 against the US dollar, to $48.84 this morning. The EU sanctions on Russia are already impacting the Russian economy, but it is being reported that these sanctions only cost the economy $40bn a year. On the other hand, it is being reported that declining Oil prices could cost the Russian economy another $100bn a year. When you combine these two factors alongside a strengthening US dollar, it is going to make the Central Bank of Russia’s (CBR) attempts to rebalance the ruble far more difficult.

The Aussie also declined by as many as 130 pips on Thursday, with the comments from Phillip Lowe, RBA Deputy Governor, that the currency should decline in line with falling commodity prices remaining at the forefront of investors’ minds. Since dropping below the critical 0.8540 support level, the Aussie has found further support around 0.8472. However, the Aussie is teasing a move back towards the latter support level this morning, and a break below opens the doors for it to trade at its lowest level since early June 2010.

Throughout 2014, the RBA has repeatedly warned that the Aussie was set to experience a substantial decline and we have now seen the pair drop from 0.9400 since early September. Since the RBA began warning the currency would weaken as far back as April, it was always expected amongst analysts that the move would happen in the latter months of 2014, and this is exactly what is happening.

The other currencies that were impacted by the OPEC decision were the USDCAD, which extended by 120 pips, and the Norwegian Kroner, which has weakened from 6.8109 against the USD to 6.9538. With the markets already rushing in to price in further longer-term declines in the price of Oil, investors should really look at for how central banks react to the decision. We are probably going to see more policy makers come out and make dovish statements regarding the need for a weaker currency, in response to a decline in commodity prices – as the RBA already have done this week. Weaker commodity prices are going to continue having a short-term impact on inflation readings, which will make Mario Draghi’s job to prevent the Eurozone from slipping into deflation even harder.

The EURUSD weakened by as many as 60 pips yesterday and concluded trading at 1.2462; the GBPUSD weakened by a similar amount. Both downside moves confirm that these pairs’ gains during the early part of the week were linked to USD profit-taking, which in turn inspired some risk appetite into the currency markets. Later this morning, Eurozone inflation figures for November are announced and with risks remaining that the ECB may spring a surprise next week, this is largely why the Eurodollar is already pointing south.

The Cable has suffered greater losses on Friday morning, with the pair dropping by almost another 40 pips and threatening a move below 1.57. The reason for the Cable losses this morning is not due to economic data, but caution ahead of UK Prime Minister David Cameron’s speech to the European Union. The Prime Minister is largely expected to announce plans for stricter welfare benefits for migrants entering the UK but the major downside risk for the GBPUSD is that if these reforms are not agreed by the European Union, it will raise the prospect of the UK leaving the EU.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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