Commodity Currencies Rebound After Oil Rise

Doha Summit Failure and Kuwait Oil Strike Made for a Volatile Weekend for Crude

Volatility in energy prices and a return of risk appetite have pushed commodity currencies upwards after prices tumbled at the Asian open on Monday. The Australian dollar (AUD), New Zealand dollar (NZD) and the Canadian dollar (CAD) have been the biggest winners in the aftermath of the Doha oil freeze agreement failure which drove currencies lower before the Kuwait oil strike did something not even Organization of the Petroleum Exporting Countries (OPEC) and Russia were willing to do, cut crude supply levels.

Other commodities have risen: copper, nickel and iron to further solidify the gains for the AUD, NZD and CAD. The AUD/USD has gained 0.799 percent in the last 24 hours and 1.866 percent in the last 5 days. The NZD/USD has advanced 1.272 percent in the last 24 hours and 1.903 percent in the last week. The USD has lost 1.185 percent versus the CAD in the last 24 hours.

The price of oil has led the recovery in the commodity markets. Failure to reach an agreement has not ben as devastating to producers as a new agreement is anticipated as a market share price war would tear the OPEC apart. The U.S. crude inventory report will be released on Wednesday, April 20 at 10:30 am EDT and will guide commodity currency prices. Inventories are forecasted to rise by 2.2 million barrels after the surprise rise of 6.6 million last week.
Rising price of commodities turning back the clock for the loonie

The Canadian dollar is trading at 1.2645 levels not seen since July 2015. The high correlation between crude and the CAD is well known and has intensified as oil producers were near an agreement to freeze oil output at January levels. The fact that the production cap is almost a record high for producers has not mattered as much as the fact that they are willing to cooperate. A OPEC and Russia deal would involve almost 77 percent of the oil by quantity in the world.

 

Canada has suffered as a largely resource based economy. Unemployment and investment have fallen in oil rich Alberta. The Bank of Canada proactively cut interest rates twice in 2015 to a record low of 0.50 percent. The drop in the oil price following the Asia led stock market sell off put further pressure on the central bank to cut again. Bank of Canada (BoC) Governor Stephen Poloz decided to hold and wait for the Federal government to make their move with their awaited budget. The Liberal party had won the elections with an economic platform based on investment in infrastructure to stimulate the economy.

 

Canada has achieved some success in diversifying from natural resources and that owes a lot to the weakness of the currency. The question now is which one is more important for the long term health of the economy? Sustained low oil prices to restart Alberta or a weaker loonie to boost exports and services. The central bank has little insight on which scenario will play out, but at least they have positioned the economy to benefit in either one in the short term, and asking for flexibility to adapt if the strategy (fiscal stimulus and monetary easing policy) does not bring positive results.
Oil Push So Strong Higher Dairy Prices Not Doing Much

 

The NZD has touched 70.31 versus the USD a level not seen since June, 2015. The commodity rebound brought about by the oil shock in Doha has pushed the Kiwi rally further. The strength of the oil boost has the currency not reacting as strongly to other positive news such as the increase in the price of dairy. It appears the rise in commodities in general is seen as beneficial to the NZD. Traders will be on the lookout for U.S. crude inventories and the situation in Kuwait to see if the biggest driver continues to support the Kiwi.
AUD Flying High After Kuwait Strike Keeps Oil Bid

 

Reserve Bank of Australia (RBA) Governor Glenn Stevens spoke in New York this morning highlighting the recovery of commodity prices, but his speech did not take into account the changes over the weekend or the fast rise of the Australian dollar. The RBA has been careful when commenting about the strength of the currency as it could limit their competitive advantage for exports, specially in non-resource based sectors.

The minutes of the RBA’s meeting did little to slow down the rise in the AUD as again the concern with a strong currency was noted. The rise of commodities that is feeling the Aussie rally should not force another rate cut from the Central bank as Stevens has said he would rather have low growth than low rates.

Forex market events to watch this week:

Wednesday, April 20
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
10:30am USD Crude Oil Inventories
Thursday, April 21
4:30am GBP Retail Sales m/m
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, April 22
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m

 

*All times EDT