FX Weekly – Oil recovery supports sentiment

by: Georgette Boele

In this publication : Oil price recovery supports investor sentiment resulting in a lower yen, euro and Swiss franc and a higher dollar and currencies of oil exporting countries. Central bank reflation efforts to eventually support growth and sentiment.

 

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Oil price recovery supports investor sentiment…

This week there has been a positive spill-over effect from oil prices to other financial markets. The 15-20% rally in oil prices (since 11 February) has resulted in an overall improvement in sentiment in financial markets. As a result, currencies that performed well in a risk-off environment, such as Swiss franc, Japanese yen and the euro suffered. Moreover, currencies of oil-exporting currencies recovered substantially. The Russian ruble and the Mexican peso have both rallied by more than 5% since last Thursday. The surprise 50bp rate hike by Banxico accelerated the recovery of the peso.

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Our energy analyst expects that oil prices are currently in the process of bottoming out. This process is often volatile in terms of price action on an intraday level. The crucial level to watch are the previous peaks in oil prices around 35-36 USD per barrel. If we break through this level, currencies of oil exporting countries are likely to advance sharply.

…so do central banks’ reflation efforts

Other crucial dynamics to watch are action and comments from central banks. Overnight, FOMC official James Bullard signalled that rates hikes are unlikely this year. Comments ECB President from Draghi at the start of this week were pointing into the direction of a step-up of monetary policy easing. In the near-term, officials from the Norges Bank (today), the Riksbank (23 February) and the Swiss National Bank (23 February) are on the wires. We expect them to sound dovish with regard to monetary policy. The Norges Bank and the Swiss National Bank will both decide on monetary policy on 17 March, one week after the ECB meeting. Reflation efforts from central banks this year will support growth and calm sentiment in our view. However, sharp directional moves will become less likely. In the coming months we expect the euro to move lower towards 1.05 versus the US dollar because of improvement in investor sentiment and the effects of ECB easing on EUR/USD will outweigh the effect of the Fed putting rate hikes on ice.

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