Oil slick, ironed out
The focus of the first 24 hours of this week has been almost exclusively on commodities and emerging markets with some big moves increasing the uncertainty as we close out the year. Both oil and iron ore prices took a substantial beating yesterday, dragging commodity currencies lower and increasing the fears of additional deflationary pressures through developed economies in the coming year.
OPEC’s decision to hold production at current levels on Friday, keeping the supply glut in essence, alongside continually poor economic data from the developing world has maintained the double-whammy of disappointment for commodities in general. Demand is weak and supply is massive; prices are coming lower with some business pages talking about oil at $20 a barrel. It is currently trading at $37.
The outlook for commodities is predicated on growth; grow and demand picks up. The weak growth of the global economy alongside the huge inventory will maintain prices at these low levels for a while one would have to think. We do not know where the bottom is, but it is not here.
Loonie tuned
You don’t have to look far for the impact of these shifts. The Canadian dollar fell to its weakest level versus its US counterpart for over 11 years yesterday while Norwegian krone, Russian ruble, Nigerian naira all tumbled. Likewise, in a wider commodity stance weakness was once again felt in Aussie and kiwi dollars and the South African rand. As much as these economies have outsourced their growth to China via the global supply chain, their currencies’ backbone has been too.
The next shoe to drop will be bankruptcies in the mining sector, or defaults on debt at best, similar to what is happening in the Brazilian power sector.
China unable to help
China’s ability to help remains in doubt following a weak trade balance report. Exports fell by 6.8% on the year with an 8.7% decline in imports. Yesterday’s currency reserve numbers from China, falling by $82.7bn on the month, have also hit sentiment and speak to the fears that China is is undergoing a larger capital flight than markets had anticipated.
USD/CNY has once again been fixed higher by the People’s Bank of China overnight and the divergence between onshore and offshore CNY has risen back to levels not seen since the August devaluation. This is a clear sign of additional capital flows with yuan depreciation still seen in forward markets.
The Day Ahead
Today’s European session will have UK industrial and manufacturing production and the latest Eurozone GDP data to contend with. Risks remain to our positivity on the UK economy with economic weakness in major export markets front and centre. Domestic demand is strong enough to take up the slack for now but noises from the manufacturing industry in the short term are a worry.