The dollar is broadly higher this morning after risk appetite soured as falls in crude oil prices accelerated. JPY is dominating G10 FX along with CHF, while EM currencies are mostly in the red. The timing of this morning’s broad dollar bid is interesting, as it comes after several days of relatively steady price declines that had no effect on risk appetite or the greenback. Brent crude oil fell below $30/barrel this morning, while West Texas Intermediate fell below $20/barrel.
Today’s collapse in crude oil suggests market participants have weighed the OPEC+ production deal and found it insufficient to offset the seismic global collapse in demand for crude oil. Although crude oil prices were declining for several days and began to collapse this morning prior to the release, this point was underlined in an International Energy Agency in their Oil Market Report today. The agency forecast that oil demand would fall by 9.3m barrels a day year on year in 2020, concentrated in the first half of the year where demand will be an astonishing 23.1 mb/d lower.
Even after the OPEC + cuts agreed last week, and purchases by various national strategic reserves, the sheer size of the demand drop in H1 means that stockpile levels will rise globally in the first half of the year, pushing storage and logistics capacity to their limits. The sheer size of the production overhang, combined with limited inventory space, means that spot crude prices are likely to continue to collapse relative to delivery in the future, pushing the market further into contango.
At the moment, it does not yet look as if this is the beginning of another period of sharp US dollar appreciation.
In percentage terms, today’s USD strength is small compared to the past couple of weeks, which mostly saw G10 and EM FX regain ground lost to the greenback in March. There is little sign yet of the dollar funding pressure or tightening in financial conditions that accompanied March’s massive US dollar bid, suggesting that the Fed’s liquidity and credit easing measures remain effective for now. Three-month cross currency basis swap spreads are positive for EUR, JPY and GBP, while LIBOR-OIS spreads continued to narrow this morning. However, if today sees a fresh round of carnage in US equity markets, broader financial conditions may not remain benign for long.
For now, the US dollar is snapping back across the board after several weeks of mild losses…
In isolation, lower oil prices do not necessarily spell doom for global risk assets and another leg higher for the dollar, although oil-linked currencies and energy equities will suffer. However, provided financial conditions remain steady and US dollar funding pressures do not re-emerge, further losses in crude may trigger only limited US dollar strength, concentrated against oil producing currencies.
Chart: OPEC+ production cuts weighed and found wanting by oil markets
Chart: Brent & WTI, with US dollar index DXY added
Author: Ranko Berich, Head of Market Analysis