OPEC output cut to trigger a fresh rally in USD against Asian Currencies

The Organization of Petroleum Exporting Countries (OPEC) group is set to meet tomorrow in Vienna to decide whether an output cut is necessary to stabilize the falling Crude prices.

Most experts believe, modest cuts would do little to prop up the prices. If the member nations come to an agreement, the output cuts is unlikely to be more than a million barrels a day. At that level, the group is unlikely to make any significant difference in a market that produces more than 90 million barrels per day.

Moreover, analysts say Crude can fall to USD 60.00/barrel, if the OPEC fails to cut the output. Going by the rift between the member nations, markets are pricing-in a low probability of a significant output reduction tomorrow.

Thus, the outcome of the OPEC meet may be divided into broadly three scenarios –

• No output cut

• A “Symbolic” output cut of a million barrels a day

• An output cut of more than a million barrels a day

Asian markets outperformed due to falling oil prices

• Falling oil prices have been a boon to most Asian economies - The stock markets in India, the Phillipines and Thailand clearly outperformed those in the West during the high market volatility witnessed in October. Moreover, the advanced nation stock markets had declined on the fears of disinflation/deflation due to falling energy prices.
  
  Meanwhile, Asian stock markets outperformed as slumping energy prices shall lead to a much needed drop in trade deficits and inflationary pressures.

• Most Asian economies except Malaysia are oil dependent - Asian emerging markets, with the exception of Malaysia, are high importers of Oil. The list also includes Japan and China. Their currencies are the highest beneficiaries of the Oil price slide.

US Dollar would gain if

OPEC announces a symbolic output cut – In case of a symbolic rate cut, Crude prices are likely to post modest gains since the commodity is oversold. Moreover, a symbolic rate cut would trigger speculation that the OPEC group may implement more cuts if prices continue to slide. Thus, prices may either rise or stabilize at the current levels in the short-term.

In such a case, the oil importers in the Asian economies are likely to begin booking import contracts in anticipation of further output cuts and price rise. This reaction is more likely if the Brent Crude prices stabilize around USD 80.00/barrel levels.

OPEC announces an aggressive output cut – A very clear scenario for a fresh rally in the US dollar across the board as markets would consider Crude prices to have bottomed out at the current levels.

In both the cases, the Asian emerging market currencies are likely to take a hit against the US dollar. Following pairs provide an attractive buying opportunity (under scenario 2 and 3) in the short-term -

USD/INR – The Rupee is already on a slow and steady declining trend due to the competitive devaluation in Asia, high domestic inflation and the threat of rising trade deficits due to rising gold imports. Under such situation, a rise in Crude import bill will further damage the Rupee. Expect USD/INR to test 62.70 levels.

USD/JPY – The reason for a sharp decline in the Yen are well-known. However, a rise in Crude prices shall further widen the Japanese Trade deficit and weaken the Yen. Expect the USD/JPY pair to re-test 118.79. The Pair may even extend gains to 120.00 levels in case the OPEC announces an aggressive cut in their output

USD/CNY – Chinese Yuan has been hit with an interest rate cut last week. Being the world’s fastest growing economy and one of the largest importers of Crude, the Yuan is sure to feel the heat from the rising Crude prices. Expect USD/CNY to test 6.16 and 6.178 levels.

To Conclude

• As mentioned earlier, most Asian economies are crude importers. Hence, their respective currencies would take a hit under scenario 2 and 3.

• It is worth noting that the Asian currencies are already under pressure due to the sharp competitive devaluation of the Yen post Oct. 31.

• Meanwhile, it is a no-brainer to forecast that a further fall in Crude prices shall strengthen the above discussed Asian currencies. However, gains are likely to be modest, again due to the competitive devaluation of Yen post Oct. 31.