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Oil On Slippery Slope

Crude oil still hasn’t learned any manners. West Texas Intermediate prices plunged almost four percent yesterday, down almost twenty five percent for the year thus far – shocking traders who had expected the rout to halt near the $80 barrel mark. Weighed down by rising supplies and slumping global demand, front month prices are now trading near a four-year low.

Volatility is widely expected to stay high ahead of the OPEC meeting on November 27th, with market participants watching the Saudi oil ministry’s pronouncements extremely closely. Any move by the central bank of oil to cut production and support the price could be the trigger for a sharp reversal, meaning that traders are exercising an abundance of caution.

The big dollar is trading on a slightly weaker bias to kick off the session, with lower commodity prices acting to dampen inflation expectations across the curve. Investors now believe that the case for a Federal Reserve rate hike will remain weak well into the third quarter of next year, marginally reducing the currency’s yield advantage against other majors.

Euros are exchanging hands at a slight premium after third quarter growth numbers were released, with Germany managing a 0.1% expansion while France surprised with a 0.3% gain. That these results were viewed positively is a testament to the fact that the secret to happiness in life is low expectations – but these numbers only serve to confirm a widening divergence between the United States and the rest of the global economy.

Commodity-linked currencies from Norway to Russia are on the defensive – but as we go to pixels, the Canadian dollar is trading at surprisingly robust levels, down less than half a cent against the greenback. Investors are increasingly optimistic that the country will smoothly replace crude oil revenues with exports to a resurgent U.S. economy, and are trimming short positions ahead of the critical 1.15 barrier.

Risk aversion dominates across Southeast Asia this morning, after China released numbers showing that factory production slowed and investment growth hit a 13-year low in October. The world’s economic juggernaut continues to lose momentum, and the impact on markets is growing by the day.

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Karl Schamotta

Karl Schamotta

Director, FX Strategy and Structured Products at Cambridge Mercantile Group.