A sudden shift in investor sentiment

“Risk on” became the attitude of investors late on Tuesday with the NZD, AUD, EUR and GBP all concluding the day trading higher and safe-havens such as the USD moving lower. It might have been a delayed reaction, but the slightly-softer US economic data noticed over the past week finally caught up with the USD. Although there is nothing to be alarmed at with last Friday’s GDP estimate coming in at an annualised 2.6%, recent data has provided an argument for future GDP estimates to be lowered, which also means the Federal Reserve will remain in no hurry to raise interest rates.

Reality is just sinking into traders that any optimism the Federal Reserve might have been inclined to raise US interest rates early this year was always wishful thinking. The Manufacturing and Factory Orders data over the past two days are even leaving some to question whether interest rate expectations might be pushed back beyond June. There are concerns domestic momentum is slowing down, although it was noted that the first few months following the conclusion of QE might have some impact on the economy. It was also being completely unrealistic to expect the US economy to continue advancing at the annualised 5% seen in Q3. The Fed are still on track to raise rates in September.

Aside from the USD softness, what everyone is really watching right now is the sudden bounce in Crude Oil with both Brent and WTI unexpectedly advancing by $10 over the past three days. On one hand, optimism is ever-increasing that a floor in selling might have finally been located while on the other hand, questions are being asked because the economic conditions for the commodity have not really changed. Some are even speculating whether the recent bounce is just a small recovery of what have been dramatic losses for the commodity.

What is conceivable though is that the bulls have used the unexpected drop in US oil rigs as a major catalyst to gain hope that oil producers are potentially reacting to such an aggressive oversupply in the markets. For the bounce to continue, far more indications of lower oil production are required otherwise a downside risk of a sudden reversal remains. The bulls may find themselves hitting a wall later today though with US crude inventory data expected to show more oil being produced than previously forecast.

Nonetheless, the unexpected rally is music to the ears of central banks battling to prevent its currency being punished by the decline in oil. The Central Bank of Russia (CBR) will see this as welcome news, with the USDRUB now pulling back from 70 on Monday to just under 65 as trading opens today. The Rouble is not the only one benefiting from the recent rally with the Norwegian Krone also advancing. The USDNOK has also weakened from 7.7430 at the beginning of the week to 7.4839 at the time of writing. The domino impact has not ended here either with the CAD recovering over 300 pips against the USD yesterday, with the USDCAD declining to 1.2351.

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