Around a month ago I wrote an article discussing how the Russian RUB might be the next
currency to find itself in a crisis. After I published that the RUB did actually strengthen a
little as the USDRUB fell back towards 65.00. However, in the past week or two the RUB has
come under pressure with the USD closing above 68 on Friday- close to a 5% gain on the
week. To better see that all in black and white please take a look the chart below.
Whilst geopolitics lay at the heart of what I previously wrote about, it hasn’t actually been
the root cause (yet) of why the Rub has lost ground recently. Its fall last week has more to
do with the price of oil. You see over the past month the benchmark price of oil- WTI (which
had been rising for most of 2018) has fallen from above $76 a barrel, to a closing level on
Friday of just a little over $60 a barrel- at $60.19 to be exact. Please see a chart of that as
well.
Consequently, the price of WTI has now entered what’s known as a ‘bear market’. This
market terminology is applied to any financial instrument that is steady or rising and
subsequently falls back by more than 20% from its peak in any one given year. It is then said
to have entered a ‘bear market’ which WTI has now done.
The impact of this has been felt on a number of currencies where oil or oil related products
make up a significant proportion of their exports. In Russia’s case oil accounts for more than
70% of the country’s exports. Perhaps understandable then that the RUB should have fallen
back so sharply over the past 3-4 weeks.
However, Russia is not alone as there are other countries that have much to gain or lose
when oil prices move sharply. From a currency market perspective, the most usually traded
one of those is the CAD, which coincidentally enough also weakened last week. That’s
despite the fact that oil related exports account for less than 25% of what Canada sends
abroad. Nevertheless, Canada is still the worlds 4th largest exporter of oil behind Saudi
Arabia, Russia and Iran.
Back at the beginning of October when I wrote that piece on the RUB the USDCAD was
trading close to 1.28. Now, it could just be coincidental, with the dollar gaining generally
over the same period, but the USDCAD nevertheless closed at its highest level since mid July on Friday- at 1.3212.
On the flip side of all this are those countries that are huge importers of oil. As individual
states go, China has now overtaken the US as the world’s largest importer. As a region
though the EU dwarfs them both. Europe has no oil whatsoever. Now, whilst it makes sense
for the dollar to gain versus the likes of the RUB and the CAD when oil prices fall markedly
one might expect the EUR to benefit as well?
Well, right now that isn’t the case and perhaps for one simple reason- its impact is
immediately more deflationary for the Eurozone. That might have implications for European
monetary policy even if sustained lower oil prices do eventually help stimulate Eurozone
growth.
So, the last thing that the ECB probably wants to see right now are lower input prices as that
might even delay the exit from their current ultra loose monetary policy. We shall just have
to see on that, but meantime two things are almost certain; OPEC won’t like it and you and I
will probably have to wait a lot longer then we should (as usual) before we see any benefit
at the pumps!
Barring that likely outcome, the upshot of all this is pretty clear. Unless OPEC react to limit
supply, then oil prices could fall further and that will put more pressure on the CAD and
perhaps more pertinently on the RUB.
Key data releases due this week
13/11- 9.30am UK October unemployment report
14/11- 9.30am UK CPI, RPI and PPI October inflation report
14/11- 1.30pm US October CPI inflation report
15/11- 12.30am Australian October unemployment report
15/11- 9.30am UK October Retail sales report
15/11- 1.30pm US October Retail sales report
16/11- 10am Eurozone CPI inflation report