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Crude oil related currencies back under downward pressure - MUFG

FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, notes that the renewed slide in the price of crude oil has been the main market focus early this week following last week’s OPEC meeting which failed to provide any support.

Key Quotes

“As a result the prices of WTI and Brent crude oil have both declined to new cyclical lows of USD37.50 and USD40.60 per barrel. The price of crude oil has been gradually trending lower for over two months now although its decline accelerated yesterday. The impact on the currency market has been fairly predictable over this period as the Colombian peso, Russian rouble, Norwegian krone and Canadian dollar have all underperformed. Weaker currencies will help to provide support to their domestic economies as they act as a natural shock absorber against the intensifying negative shock from the depending decline in their terms of trade.”

“In our latest forecasts we had already assumed further weakness in crude oil related currencies into the first half of next year. However, the latest developments are already increasing downside risks to those forecasts for further weakness which may still prove too cautious.”

“We also expect further weakness in the price of oil if sustained to intensify pressure most acutely on central banks which are already struggling to combat too low inflation. Within Europe, it will increase pressure on the ECB, the SNB, the Riksbank, the NBP, and the NBH to ease monetary policy further in the year ahead.”

“Looser monetary policy overseas is likely to continue to provide relative support for the US dollar even if it dampens the pace of rate hikes from the Fed. The plunge in the price of crude oil since the summer of 2014 has coincided with the sharp US dollar rally during this period even as Fed rate hike expectations have been pared.”

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