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The speed of the last move lower in Oil (WTI) and the levels reached suggest to us that this move may have finally run its course (at least in the near term and POSSIBLY even the medium term)
– Our extended target on the break of $74.95 was the May 2010 low of $64.24
– The rising trend line off the 1998 and 2008 lows comes in at $64.23
– The 61.8% pullback of the 2008-2011 rally on the linear chart (not shown) is $63.89
– In 1998 (a period we constantly refer back to for guidance across markets this year) we saw an initial low in October as the Equity market “troughed”, US yields hit their low and the USD trend had a correction. We subsequently saw Oil hit its trend low in December. That low was 20.8% below the October low. Today that would translate into $62.91. The low so far has been $63.72 (19.8% below the October low)
– Monthly momentum is as oversold as it was in both 1998 and 2009. Both these periods saw sharp down moves in the Oil price. We saw similar levels also in 2001 before Oil turned higher
– IF we were to see at least weekly/if not monthly closes below the range of levels mentioned above then an even further extension is possible. But for now, the answer to the question “Are we there yet?” is YES
Bezołowiowa (zwykła benzynka)
Good support is met in the $1.81-$1.825 area. A weekly close below, if seen, would suggest extended losses towards at least $1.60-$1.62 (July-Sept 2009 lows) and possibly $1.42 (76.4% pullback of the 2008-2011 rally)
Notwithstanding that, even if we do pause in this down move, the price drop over that last 5 ½ months has been over 42% which provides a huge “tax cut” for consumers into the Holiday season
Oil currencies may continue to see weakness nonetheless
– The recent drop in Oil prices has led to Oil export nations’ currencies weakening since the summer. We are of the view, though, that the Oil decline may now be over.
– However, should Oil prices begin to stabilize or even rally, it does not necessarily mean that the currencies will follow. Therefore, we remain cautious on NOK, CAD and COP and to a lesser extent RUB (though only because it appears to have gone “too far too fast” in the near term).
Aftermath of 1998 Oil collapse
Frequent readers will be aware that we continue to draw many parallels across asset markets and economic backdrops between 1998 and today (though we view present day as more of a “lite” version of 1998). One of these comparisons has been with Oil which bottomed in December 1998 after a significant decline in prior years. Ultimately it was a V-shaped bottom and Oil more than tripled in less than 2 years from the low.
However, the recovery in Oil prices failed to spark a recovery in the currencies of major Oil exporters, especially Norway and Russia, and actually both currencies continued to weaken against the USD despite rising Oil prices (see below).
There were two dynamics at work here that, in our view, accounted for the inability of these Oil currencies to bounce back alongside the Oil price itself:
– Broad USD strength in the late 1990s – The USD was in the middle of a 5-year bull cycle which saw it outperform across G10 and Local Market currencies (just as we are currently in the middle of what we view as another 5 year USD bull cycle since 2011)
– Symptoms of “Dutch disease” – Russia and Norway had become overly dependent on Oil exports (and related services and industries). By the time the Oil price recovery was taking place, the damage had already been done in Russia (debt default). While not as dire for Norway, the Oil price decline contributed to lagging growth.
Therefore, even if Oil does stabilize and recover from here, as we believe, it does not necessarily equate to Oil currencies recovering; on the contrary, we remain cautious on the current crop of Oil currencies, namely NOK, CAD, RUB and COP.
Weekly momentum has also turned lower from very stretched levels
At this point it appears that USDRUB may have gone “too far too fast” and any stabilization/rally in Oil could also result in a correction in the currency pair. Initially a move to close the gap from November at 49.99 may be seen
However, as we saw on the first page of this section, RUB weakness need not end simply because Oil has stabilized, especially in an environment of both USD strength and Russian geopolitical tensions which are feeding into the overall economy
We therefore remain cautious on RUB and would expect higher levels to materialize on USDRUB once any correction that is seen runs its course