The oil industry slump has been one of the biggest themes in the forex market earlier this year, putting weak inflation on the list of headaches of central bank policymakers and even resulting to company shutdowns and layoffs in the energy sector. Are we about to see a repeat performance?
Wait a minute. What’s causing the latest declines?
Most forex market watchers are putting the blame on the OPEC’s decision to maintain oil production levels in their latest announcement, especially since energy agencies have already warned about a potential oversupply and a downturn in demand. If you’ve paid attention during your Economics 101 class instead of daydreaming about what’s for lunch, you probably remember that a combo of rising supply and falling demand results to downward pressure on prices.
While this would yield even lower revenues for oil-producing nations, the folks over at the OPEC cartel don’t seem to mind since they’d rather edge out the competition from U.S. oil drillers. A number of rigs have actually called it quits in the past few months, allowing OPEC leaders to rub their hands in glee. Insert evil laugh here.
How did falling oil prices affect forex price action before?
Since the financial markets are all interconnected like one big happy family, what happens in one industry typically affects the rest. In this case, oil prices proved that misery loves company by dragging most commodities down with it, weighing on global trade activity and overall consumer price levels.
Commodity-driven nations such as Australia and Canada weren’t too happy about all this, prompting the RBA and the BOC to cut interest rates twice this year in order to keep inflation and growth supported. This resulted to prolonged declines for the Aussie and Loonie, as forex traders reacted to these dovish moves and braced themselves for more.
Later on, other major economies started to see the impact of these oil price declines on their CPI readings, causing some to shift to a less hawkish stance and others to go full-on dove mode by expanding their easing efforts. In addition, this also led investors to shy away from riskier assets on fears of another global economic downturn.
How low can oil prices go from here?
On a less downbeat note, the latest selloff in oil prices pales in comparison to the tumble seen since last year. Remember when WTI crude oil was trading above $100/barrel? Yeah, me neither. Take a look at this weekly chart, though!
This chart also reveals that crude oil is approaching a key support level just above the $33/barrel mark, which might hold as a floor and trigger a strong bounce. However, a break below this area could leave crude oil and the positively-correlated Loonie yelling “Geronimoooo!”
The recent selloff has already started to affect other commodities, pushing iron ore prices to record lows and also yielding significant losses for the correlated Australian dollar. Next up might be the Kiwi, as dairy prices might drop it like it’s hot again. Think we’ll see a Round 2 of comdoll forex price action from earlier this year?