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Currencies & Oil Short to Medium Term View

October 23, 2016

by Asad Rizvi

While rest of the Global Central Banks is still in a struggling mode, G-10 countries could potentially be joined by Australian and New Zealand’s Central Bank in coming days to ease its rate.

I can safely say that FED for the time being has overcome threat of US economic recession. Stable oil prices further increases inflation expectation in USA, it also increases FED’s chances of hiking its interest rates sooner or unless it decides to further delay and go for yet another hold.

Recently we saw US Dollar gaining strength by over 5 pct against British Pound. Japanese Yen eased by nearly 3 pct and Euro too was under pressure because of last week’s monetary policy announcement suggesting easier stance.

However, we expect market to remain cautious due to November 8, Presidential Election as further big gains of USD could be short lived. During this period, market could witness choppy trades.

I am expecting resumption of US Dollar surge after the US elections, as probable Hike of interest rates by FED in December and extension of quantitative easing by the European Central Bank will be the driving factor.

Keep a note, I am yet not ruling out Trump’s victory, which could be extremely Bullish for US Dollar that will be followed by a sharp rally in US Bond market.

GBP @ 1.2227 = While, Pound Sterling that fell by nearly 18 pct against USD this year, should still find sellers on any up move, as the outcome of BREXT remains unknown and is threatening.

From now on-wards, lot will depend on negotiations and policy maker’s stance. UK data will provide further guidance, as combination of factors, which is worsening of economic condition and threat of Brexit is looming all over World will make life more miserable for BOE.

UK’s economy is already faced with sizable Current Account Deficit and further economic suffering may add pressure on its Balance of Payment. Risk of rate cut and easy policy stance would also weigh on currency, as BOE’s tone clearly suggests that weaker Pound is acceptable and higher inflation is not a matter of concern.

However, combination of factors such as Correction and US Elections may help Pound to push mildly higher for minor gains before she gets exhausted. I would still not prefer buying of Pound and would rather wait to pick the top to offload any holding or go for a short trade as downside risk is unavoidable.

I do not believe that hard Brexit has subsided or is abating, but would like to give minor room for 200-300 Pip correction, which could be possible if UK data does not disappoint.

On the upside, Break of 1.2390 Resistance zones is required for a test of 1.2550, which looks tough right now unless beaks and close above the Resistance level. On the downside, Break of 1.2080 will encourage for another test and break of 31 year low of 1.1850 levels. In Longer Term, Target 1.05 against USD is intact.

EURO @ 1.0883 = Key factors that will drive Euro in Near to Medium Term would be US elections, US economic data and off course ECB stance on Extension of Quantitative Easing beyond March 2017 will play major role in determining its next move.

In Short Term, Support lies around 1.0750-80 zones, which should hold to offer excuse for minor correction up to 1.0980 or 1.1060, unless Euro close below Support level in New York. However, close below Support level in New York would suggest 1.0550 as next downside target.

In longer term, Euro needs to fall below 1.0280 for larger drop, as only upside break of 1.1280 may delay the expected fall. My July 2016 Long Term Target of 0.9110 against USD remains intact.

JPY @ 103.82 = Bank of Japan’s Sept 21 policy stance will delay its much touted inflation stance targeting 2 pct. Since BOJ refrained from allocating funds against market expectation, it may neither help to shoot targeted inflation further.

Keep a close watch on 10-year Japanese Bond, which should remain in negative territory due to its ongoing negative interest rate policy.

However, past trend suggest that US Dollar move and US interest rate behavior always plays vital role in providing direction to the Japanese currency.

In immediate term 104.80 should hold, but JPY will find strong resistance around 101-20 levels until there is ample of evidence available that BOJ is no keener to inject funds in the name of QE, which will push JPY for a test and break of 100 Yen level against USD.


Oil = WTI @ 51- Brent $ 51.91-OPEC $ 48.51

In my July 15, 2016, note “Why Oil will not surpass $ 60-65 level”,

And in my August 22 2016 column “Oil is stuck in a Bearish Spell”

I have given enough reasoning that why oil will not surpass $ 65 and my view remains unchanged.

However, as I have indicated several times in my write-ups that if Troika of Saudi Arabia, Iran and Russia (OPEC) agree to manage oil supplies by sticking to their commitment, potentially oil prices can recover and remain stable. But there is lot of politics and supply factor involved that demands firm and honest commitment to attain $ 65-70 price level target.

Policy shift is clearly visible as Saudi Arabia’s change in stance in last couple of months can be seen as it is not mixing politics with oil. Iran too seems to have realized that managing economy and deficit is impossible task as oil is their major source of revenue/income.

But Russia another beneficiary of higher oil prices has so far played key role in negotiations and helping prices to stabilize and it still has a task in hand. Russian importance can be sensed from the invitation given to Russian Oil Minister to meet GCC Energy Ministers in Riyadh in an effort to further stabilize oil market. Estimates suggest that in 2016 until now GCC oil revenue has plunged by USD 400 Billion.

However, Iran’s insistence to produce 4 Million barrels per day Oil could be the hurdle in talks unless some sort of understanding is reached.

Saudi Arabia’s Government Deposit (SAMA) is already down by over Saudi Riyal 100 Billion to somewhere around SR 1.050 Trillion, which is nearly 47 pct of its GDP. In 2015 it posted a deficit of SA 98 Billion, as its Revenue fell to USD 162 Billion from USD 260 Billion in 2014. The good news for Saudi’s is break-even oil price dropping to around USD 67 that has foreign exchange reserve of approximately USD 555 Billion dropping from all time high of USD 737 Billion in August 2014.

Similarly, Iran is better placed as cost of producing oil dropped by 27 pct to USD 62 a barrel. Iran’s economy that had unemployment rate of 11.7 pct in 2015 is projected to grow at 4.5 pct in 2016 is suffering from double digit inflation. In 2015, its fiscal deficit widened to 2.7 pct, though survived with a current surplus of 0.6 pct of GDP from 3.8 pct in 2014. It has a total foreign exchange reserve of roughly around USD 125 Billion.

Higher oil price is good news for Russia too that has recently suffered recession after oil price collapse. Its economy is showing signs of recovery. Rating agencies have revised its ratings upwards from negative to stable. Its Forex reserves fell to USD 391 Billion from highs of USD 537 Billion in January 2013.

Meanwhile, oil market is concentrating in talks between OPEC and Russia. Shale oil production and further growth should not be neglected that led to collapse of oil prices about 2-years ago. Some estimates suggest break-even price for 50 pct of the oil produced could average around USD 45 or slightly below.

This also means as the prices climb more production will be witnessed due to advantageous cost factor that again would increase risk for sharper fall depending on size increase in production. Lower production cost has become possible because of technological advancement. But the disadvantage is that shale oil depletes at a faster pace than convention oil.

More importantly, US election result could impact future oil prices due to policy difference. Hillary opposes Arctic drilling, whereas Trump is in favor. Hillary has reservations about using Hydraulic Fracturing or Fracking technology. Trump’s priority is “Energy Dependence”. He has promised that if elected he will lift moratoriums on energy production.

It all indicates that oil price could celebrate Hillary’s win, but Trump’s victory though will encourage oil producers, but prices could come under pressure.

“One bitten twice shy”, in the conclusion of my note, I am expecting Oil prices  to exhaust around $ 55-60 levels and should not surpass USD 65 levels, as Major Conventional Oil producers are well aware of the repercussions of cheap oil production that will once again lead to possible price war and sharp oil price collapse due to oil glut will be unavoidable.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

What would $25 drop in oil price mean for the global economy?$25-drop-in-oil-price-mean-for-the-global-economy.html



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