Crude oil hit 13-year low, BCB back in the game?

Forex News and Events

BCB on its path to hike rates (by Arnaud Masset)

Over the past few weeks emerging market currencies underwent strong selling pressures as risk-off sentiment spread across financial markets. For most of them the situation will likely remain tense in the near future but should improve quickly as fears ease. In Brazil, the real moved back above the 4.00 threshold and stabilised within the 4.00 and 4.07 over the last couple of weeks. Even though we believe the current political chaos will maintain the pressure on the economy and, as a consequence on the real, the BCB may come back into the game as inflation expectations keep rising. In an open letter to Brazil’s new Finance Minister sent last Friday, Alexandre Tombini wrote that “despite the monetary policy efforts already undertaken, it is worth reiterating that, under the current circumstances, monetary policy must remain vigilant”. The Brazilian Central Bank has been on the sidelines since late July after having increased the Selic rate four times over the previous seven months from 11.75% to 14.25%. However, we have the feeling that Governor Tombini will have no choice but to resume the interest rate hiking process to try to anchor inflation expectations, in spite of a worsening recession. We could therefore see USD/BRL below the 4.00 mark; however, because of the lingering political crisis, a sustainable recovery of the BRL is not likely neither in the medium-term. Today, November's retail sales are expected to come in at -9%y/y after contracting 5.6% in the previous month.

Crude oil at 13-year lows (by Yann Quelenn)

The WTI crude has for the first time since December 2003 broken down the 30 dollar level in a context of oil oversupply and fear concerning the true state of China's economy. The major slowdown that China is facing is increasing the risk sentiment on the commodities prices. Indeed, China imports and consumes a lot of commodities and the current yuan devaluation is especially made to support national exporters and therefore maintain Chinese competitivity. As a result, markets are also pricing in a reduction in Chinese demand.

The OPEC announced in December that their production would not be lowered in order to reign in world excess surplus to more than one million barrel a day. The first collateral victims is the US whose shale industry is suffering. Plus the count of US drilling rigs is falling. In the week ending January 8 the count was 664, down by 34 from the previous weeks’ rig count, which is very far away from the highest count of 2,031 rugs in 2008. We nonetheless believe that the current oil price is due to geopolitical actions. For example, it is clear that there is a willingness to impact Russia as its economy is clearly linked to oil prices. Yet the demand for petrol is still growing year after year and at some point will get back to the excess supply. In the longer term, in a few years, we foresee much higher oil prices.

GBP/USD - Sliding To 6-Year Low.

The Risk Today

Yann Quelenn

EUR/USD keeps on riding the downtrend channel. Hourly resistance may be found at 1.1096 (28/10/2015 low) while hourly support can be found at 1.0524 (03/12/2015). Expected to further decline. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD is weakening and is now trading below 1.4500. Hourly resistance is given at 1.5242 (13/12/2015 high). Stronger resistance can be found at 1.5336 (19/11/2015 high). Expected to show continued weakness. The long-term technical pattern is negative and favours a further decline towards the key support at 1.4231 (20/05/2010 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is consolidating higher. Hourly resistance lies at 123.76 (18/11/2015 high). Expected to further decline towards hourly support at 116.18 (24/08/2015 low). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USD/CHF's uptrend momentum keeps going as long as the pair remains in the upward channel. Support is located at 0.9876 (14/12/2015 low). Hourly resistance can be found at 1.0125 (05/01/2015 high). Expected to monitor toward support implied by uptrend channel. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: