We noted in this week’s Week Ahead that the risk-off move in FX that accompanied last week’s oil price falls was relatively small and short lived, and that dollar funding conditions, as well as US financial conditions, remained well supported by central bank easing.
This weakening of binary risk on/risk off dynamics may create trading conditions in G10 FX more conducive to idiosyncratic drivers such as economic and virus data. In keeping with this theme, NZD has managed to remain in the green against the US dollar today, amid another collapse in May delivery crude oil prices that has seen the rest of the G10 dragged lower against the dollar.
Although most crude oil benchmarks are lower today, the losses have been most intense for May delivery West Texas Intermediate, which fell as low as $11.04 this afternoon, the lowest since 1998. The May contract expires tomorrow and was trading above $20 a barrel as recently as Friday. The Brent benchmark was better supported at above $26/b. The base driver of this morning’s falls in WTI remains severe global oversupply amid a historically sharp fall in demand. However, the fact that June delivery contracts continue to trade around $22 a barrel suggests that the latest falls in spot prices are symptomatic of fears of storage constraints in the short term, as opposed to concerns that oil demand has deteriorated even further.
The spread between the May and June contracts has widened to unprecedented levels…
This highlights the fact that investors do not expect current prices to remain market-clearing for long as supply conditions ease slightly in the coming months, consistent with last week’s IEA report.
Although petro currencies are weaker at the margin today, the falls are relatively tame compared to the last couple of months.
This reflects the fact that the volatility in the absolute front end of the oil curve does not make a huge difference to the macro outlook for economies such as Canada or Norway, where massive oil price shocks are already priced in for the local currencies.
In terms of macro data it’s a relatively quiet afternoon, although news about plans for easing restrictions for individual states in the US, and a potential fresh $450 billion of small business loans in, may provide some impetus for further volatility.
Chart: May WTI contract plunges, but June well supported
NZD reacts favorably to easing of lockdown measures
Author: Ranko Berich, Head of Market Analysis.