Oil enters “Bear market” territory

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


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


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