Dynamics in oil markets continue to dominate FX market pricing today. After yesterday’s headline-grabbing slide in WTI, which saw May delivery prices dive deep into negative territory, oil markets remain on the back foot and with more meaningful consequences for FX. Today’s oil price slump is wider spread than yesterday’s, impacting the WTI futures curve as a whole while Brent prices also dip below $20 for the first time since 2002.
Arguably, the stimulus from yesterday’s slide into negative territory came from speculative trading, which was squeezed substantially as the contracts came towards the close of trading for May delivery.
Goldman Sachs said the move into negative territory was owed “entirely to the binding constraints of trading commodity futures into expiration”. With speculative traders looking to seek arbitrage from price changes as opposed to the physical delivery of crude, the prospect of barrels of oil arriving at their doorstep with nowhere to store it prompted a rout in the futures market for May delivery. Investors dumped the contracts to such a large extent that they began to sell at a negative price to avoid the cost of storing the deliverable product, in effect paying the buyer in order to exit their long positions before expiration the next day.
Without the ability to roll positions, the May WTI contract closed at -$37.6 per barrel, the first negative settle ever after the largest one-day sell-off of $55.9 per barrel. While this soured risk sentiment in markets, petro-currencies weren’t as impacted as one might have expected. This is because the slip in oil prices wasn’t necessarily reflected in other oil pricing outside of the May delivery WTI future. Prices in the June delivery future only fell only $4.33 open-to-close, while Brent crude prices fell only $2.68.
Today’s slide in crude markets has a more direct impact on FX, however, due to the more broad-based slide in oil prices…
NOK and CAD were already trading heavy in the early hours of today’s session as yesterday’s price action weighed on sentiment in markets today, but the ensuing slide in WTI contracts further along the futures curve and the drop in Brent lead to a larger and more concerning repricing in global markets. While Brent has stabilised back above $20 a barrel, its slip below the psychological level marked its lowest price since 2002, extending the rout in NOK beyond a percentage point against the dollar. Further pressure on WTI for June delivery, which fell as much as $9.53 dollars to $11.79 earlier but has recently settled above $16 for a fall of nearly $5 thus far, is also weighing on petro-currencies such as RUB, MXN and CAD today. Notably, the US dollar is fairly well bid in today’s session not only due to risk aversion, but potentially even a by-product of USD demand to pay margin on loss-making oil contracts. This source of USD demand was prominent around mid-March when equity and commodity markets were in freefall.
Graph: Today’s WTI price action shows further pressure on future delivery prices compared to yesterday’s which is weighing on petro-currencies
NZD on back food after dovish RBNZ comments, policy proposals
The New Zealand dollar has erased all of yesterday’s rally after Adrian Orr spoke in a webinar hosted by the Trans-Tasman Business Circle. The Reserve Bank of New Zealand Governor did not rule out negative interest rates but said they were better suited to a long and stubborn economic contraction, meaning they were not the best tool for the virus shock, which is likely to be sharp and short. He also seemed receptive to the extension of the Bank’s current $33bn QE program, saying this will be examined in May. The most interesting part of his comments was the seeming receptiveness to the prospect of direct monetization of NZ Government debt, which he said the bank remained open-minded about. On top of this, the RBNZ formally floated the removal of mortgage loan-to-valuation restrictions early this morning. The macro-prudential tool has been used to prevent excessive high leverage mortgage lending and its removal would presumably support lending for house buying. House prices remain a major channel of influence on consumer spending in New Zealand, and loosening these restrictions would be another means of supporting aggregate demand in the economy.
Graph: Extended Majors returns vs USD today
Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst