'The past 36 hours have seen global growth concerns begin to weigh seriously on crude oil prices, with Brent crude closing yesterday at a 21% fall from April’s highs – and therefore in a bear market. Yesterday afternoon saw WTI follow Brent into a bear market, sparking further selling. This was before the surprise 2.4 million barrel build in crude inventories, which compounded these woes and sent crude yet another leg lower, sending NOK and CAD into a tailspin.
A few thoughts on the drivers and implications of the move:
It looks like this afternoon’s sharp crude selloff was driven by two things: bearish sentiment due to WTI following Brent into a bear market, and a surprise build in US crude oil inventories. The backdrop for this move, and the real driver of the recent crude weakness, is the latest fears of a global growth slowdown due to US-China trade tensions.
Crude oil prices weakened yesterday, with Brent closing the session 21% down from the year’s highs, meeting the definition of a bear market. WTI broke below $53.61 a barrel this afternoon, meeting the same criteria and sparking a further selloff. The DOE crude data was just the cherry on the top, compounding crude’s losses and taking WTI to just above the year’s lows.
Today’s official DOE crude oil inventories data showed an inventory build of 2.4 million barrels, when the median forecast was a draw of 2.5 million barrels. DOE inventory data is volatile and normally one sharp build would not cause such a sharp move in markets – but as discussed above the data came at a time when crude was already under broad pressure.
EURNOK has seen the worst of the pain. The euro is still enjoying some haven demand from this week’s escalation in US-China tensions, which has placed pressure on EM currencies and seen EUR bid on carry trade unwinding. How long the euro strength can last is uncertain: slowing China growth will hit the Eurozone economy hard, especially Germany which is seeing recessionary conditions in its export orientated manufacturing sector.
Euro NOK exchange rate
The move in US crude markets sent the loonie to crack through our projected near-term range for USDCAD of 1.31-1.33 and added another negative externally derived dynamic for Poloz to face. The cross-winds are building for the BoC and are currently angled underneath the USDCAD cross, helping it move higher with relative ease. The question now is how far the rally in USDCAD can go. For now, it is hard to look past the $1.34 mark, as WTI oil sits supported at June’s lows. That being said, continued monetary easing globally nods towards the deteriorating external climate, with substantial fears of a global economic recession building. Crude oil markets are also facing similar negative sentiment, and are trading on continually falling demand pressures, suggesting fresh 2019 lows could be in sight at the $45 level.
Recession fears are travelling to haven currencies too. JPY has increased its rally further to sit higher at +0.8% on the day while the swissie also sits up half a percentage point.'