Excess supply main driver behind continued weakness in oil price; carnage across equity markets on open; AUD & NZD out of favour as market moves to risk off mode

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It was another big risk-off day, with falling oil prices doing the damage. Brent crude futures began to tumble (again) 24 hours ago pretty much on a continuous basis and are down circa 5% to 27.40. This big move flowed through the various markets as they opened, Asia, through to Europe, through to the US, with equity market falls in the order of 3% being a common move.

Sentiment wasn’t helped by the International Energy Agency commenting that markets could “drown in oversupply”. Indeed, it does appear that supply is the key driver of falling oil prices than demand. As long as production runs ahead of demand then prices need to fall to some sort of pain threshold, which forces a closure of production facilities. Normally investors would consider the positive “tax cut” effect on global consumers, but investors are worried about credit exposure to the energy sector – both energy producers and banks which lend to them – and the massive cull to global investment in energy projects. On NAB estimates, the latter could amount to one-third of global GDP. 

Not surprisingly the Yen has been the best performing currency, with USD/JPY reaching its lowest level in more than a year of 115.98. The cross currently trades down more than 1% at 116.45. Other safe-havens like the Swiss franc and euro also outperformed. EUR/USD made a strong move last night and peaked at 1.0976, but it couldn’t sustain that gain and it currently trades up 0.1% at 1.0920. GBP was also well supported, following the release of stronger than expected labour market data, with Britain’s unemployment rate falling to its lowest level in almost a decade of 5.1%.

The Bank of Canada chose not cut rates at its meeting. The market thought there was a better than even chance of a 25bp cut. CAD strengthened by almost 1.5 cents, until traders realised that the rate cut was likely only merely delayed, so the move was not sustained.

The AUD and NZD were out of favour as commodity prices tumbled. In NZ’s case an added source of downward pressure came from a very weak CPI reading. NZ’s Q4 CPI way undershot market expectations, falling by 0.5% q/q and rising by 0.1% y/y.  This was the smoking gun traders were looking for to take both rates and the NZD lower. NZD fell by roughly a cent on the news. 

NZDUSD was trading at 0.6470 before the release and promptly plunged to 0.6405 and continued to drift lower thereafter, reaching a low of around 0.6350 last night. Surprisingly, the NZD has held up very well since, considering the steady fall in oil and equity prices since then. It’s actually up from that level and currently trades around the 0.6400 mark. We think this reflects trader positioning and trying to hold certain levels, rather than any fundamental factor that has supported the currency.

AUD also moved lower as oil headed down yesterday but, like the NZD, has held up well over the past 12 hours or so. It currently trades at 0.6870, down about 0.6% from the last NY close. NZD/AUD fell by about 1.5% after NZ’s CPI result, trading down to a low of 0.9223 yesterday afternoon but has since recovered by a cent to 0.9323.

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