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Oil Prices and Sanctions Back Russia into a Corner

A moderate rebound after yesterday’s slide in global equities is underway, with the DXY also coming back with a bid tone as the oil market U-turns in the wake of the short covering rally that transpired yesterday.   USDJPY has ebbed higher on favourable interest rate differentials and the corroboration of the narrative surrounding a divergence of monetary policy between the Federal Reserve and other developed central banks after speeches from Fed members Fischer and Dudley.   Both Fed speakers were on the circuit yesterday opining the disinflationary pressures from a drop in oil would only be transitory in nature, instead playing up the transfer of buying power to the consumer and the stimulus-like aspects of lower energy prices.   Dudley also reiterated his stance that a rate hike in mid-2015 is seen as reasonable, and likely reflects the stance of the additional members in the Fed’s inner circle of Yellen and Fischer.   The boost in the greenback has pushed USDJPY above the 119 handle heading into the North American open, while the Nikkei managed to post a gain of 0.42% during its trading session.

The first central bank to meet this week was the Reserve Bank of Australia, and as expected, maintained their benchmark interest rate at 2.5% while reaffirming their forward guidance for a period of stable interest rates.   The RBA and Governor Stevens did note that while the domestic currency had trended lower due to a strengthening USD, a lower exchange rate for the Aussie would be needed to achieve balanced growth in the economy.   The Aussie initially moved higher on the news after seeing no change in the forward guidance from the RBA, but the strength quickly faded as traders keyed in on dovish AUD rhetoric and pushed the AUDUSD into the mid-0.84s.

While still speculative in nature, the rumors surrounding Saudi Arabia’s intentions to exert pressure on Russia by allowing oil prices to slide appears to be taking their toll, as it was announced overnight the Russian economy was likely to shrink by 0.8% in 2015, a result of lower oil prices and sanctions from the West.   This comes on the back of Russia scraping the South Stream gas pipeline project after having issues with getting the necessary permissions from Bulgaria to run the pipeline through the country, blaming pressure from the European Commission aimed at sidelining the project.   The Ruble quickly reversed yesterday’s gains (rumored to have been the result of central bank intervention to prop up the domestic currency) with USDRUB rising by over 4% to trade through the 53 handle.   Though the changing energy landscape is likely out of Russia’s hands, one must wonder how long Russia can withstand sanctions from the West before extending and olive branch in the hopes of avoiding a more dramatic slowdown in GDP growth.

Heading into the North American open, the economic calendar is very light, but equity futures are managing to stage a modest rebound and are pointing to a positive open when the bell rings.   Oil futures have seen renewed selling pressure after yesterday’s bounce, with front-month WTI sliding back below $69/barrel and taking the Loonie along with it.   USDCAD will likely be range-bound ahead of tomorrow’s busy day that includes both US ADP employment numbers and the Bank of Canada rate decision, likely pivoting on either side of 1.1350 as oil prices drive short-term direction.

Further reading:

USDomination – Greenback advances across the board, new USD/JPY high, EUR/USD not waiting for the ECB

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Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.