WTI losses continue as commodity linked currencies feel the consequences

While the headline attention continues to focus on Greece, investors could have found some outstanding opportunities to price weakness into those currencies linked to commodity prices yesterday. The timely combination of a return in Dollar appetite and further declines in the price of WTI spells bad news for those currencies linked to declining commodities, and they felt the brunt of it on Thursday. The Canadian Dollar, Australian Dollar, New Zealand Dollar, Russian Ruble, Malaysian Ringgit and Mexican Peso are all hurting right now, and there’s potential for this to continue further if the value of WTI continues to weaken. Monthly lows against the Dollar were recorded for all the previously listed currencies with the NZDUSD dropping to a new five-year low at 0.7127, which will please the Reserve Bank of New Zealand (RBNZ) and limit any potential return to currency intervention talk.

Will the pain for these currencies come to an end? That would depend on whether the selling in WTI comes to a pause. Saying that, the price of WTI dropped to a two-month low at $56.50 yesterday and its outlook is appearing increasingly bearish. The reason for the $4 over the past week has mainly been correlated to a return in investor appetite towards the USD, but purchasing sentiment would have been damaged by yesterday’s US weekly inventory report which showed that oil production is on the rise again. I had previously thought that the prospects for a brighter conclusion to the week for the oil markets would have been lifted by the US GDP figure, which will be announced later this afternoon, showing a stronger than previously estimated contraction, but this optimism has been reduced in the past few days by US economic data supporting the Federal Reserve’s view that the downturn seen at the beginning of the year was just temporary.

Before going into the USD rally in more detail, one other commodity which I am keeping a very close eye on is Gold because it is currently flirting with the $1180 level that was previously seen as critical psychological support. Although the Federal Reserve are clearly not going to be in any hurry at all to raise interest rates, if the GDP figure this afternoon supports optimism that the Fed will still be raising rates later this year, don’t be surprised if investors begin to price in further declines into Gold. If we drop below $1180, we only have minor support before the multi-year lows around the $1150 region. I would be surprised if we extended lower because there is zero chance in my opinion of a US rate rise in June, however there is still potential for the bears to squeeze the price of Gold a little further.

Now in regards to the recent USD rally, it does look like it is sustainable and with some longevity left mainly because the US economic data this week has supported the Federal Reserve’s earlier suggestion that the decline noticed in economic data at the beginning of the year was just a temporary trend. There is still strong optimism that the Federal Reserve will be raising rates this year, and I have always maintained that it would be in September. What I think Janet Yellen achieved in her comments last week was provide assurances that there will not be a swerve in direction from the Federal Reserve, because otherwise the Dollar would have been exposed to great levels of vulnerability. It is worth pointing out however that Yellen still refused to provide any potential timeframe for a rate hike, with this meaning that it is possible for interest rate expectations to be pushed back until December if needs be.

In line with expectations, the GBPUSD has continued to decline with the most recent monthly low being noted at 1.5259. The bears saw the recent close below 1.55 as an opportunity to price in further declines, and they have exploited this with further weakness being seen in the pair. UK economic growth was confirmed as having grown at 0.3% in the first quarter of 2015, which is half the pace of the previous quarter and investor sentiment would have been weakened by the news that the Services sector expanded at its slowest speed for over two years. Indications from the Queen’s speech that a bill on an EU referendum would be rushed through parliament, at the same time UK Prime Minister David Cameron begins his own campaign with EU leaders, has also weighed on investor sentiment.