Several, central banks have been raising interest rates this week, initially led by the Federal Reserve’s 75 basis point hike. The only CB not to succumb to a rate hike was the Bank of Japan, which said it would keep monetary policy loose. With a significant drop in oil prices, the economy could be freed from higher inflationary pressures in the future and the Fed would take the credit for it. If the Fed sees any data which highlights inflation expectations are growing, another 75bps rate hike in July is likely. We heard from some Fed members today. Fed’s George said that she was not in favour of the recent 75bps hike, whereas Fed’s Kashkari said he supported the recent policy action and could support another in July.
This week’s price action is the first consecutive weekly decline in oil since early May and in the big picture, it is a small correction within a larger sideways range between $100 and $120 per barrel. There is still a long way to go before we can get bearish on the Brent contract. The COT report shows that the Commercials who are traditionally hedging the physical product have added to their shorts but on the disaggregated report they are still not fully hedged short. When they get below the signal line, I would expect the selling pressure to be too much for the speculative longs to absorb.
The International Energy Agency (IEA) warned this week that soaring oil prices and weakening economic prospects dimmed the outlook for future demand. With Russia finding ways to sell their oil to India and China at a discount, that leaves more oil producers able to sell to the countries applying sanctions on Russia. This may help the supply side; it just takes a while to re-direct the flows. The CEO of Sberbank said that an infrastructure network for sending exports to the East is a priority for Russia. There is also news that Russia intends to increase oil exports in 2022 and that new gas pipeline routes should be open soon.
We also heard from Russian President Putin, who said that Russia was not threatening anyone with nuclear weapons and that Ukraine joining the European Union is the business of “Ukrainians and the Ukrainian authorities”.
The USDJPY had a strong up day today but has not quite breached the swing high. The US 10-year yields continued to fall from the recent highs of 3.500% as investors seek the safety of the US Treasury markets as equities continue to trade lower. The divergence between the benchmark yields and the USDJPY could be signalling a slowing momentum in the rise of the USDJPY and if we were to get lower oil prices, that would also help support the yen.
The strong US dollar though and weaker energy prices helped lift the USDCAD and we saw a sweep of the recent swing high. A close above that level would be very bullish. Intraday traders may have looked at the hourly chart which didn’t close above the 1.30760 and see that as an opportunity to short the USDCAD back down towards 1.2800.