The Forex market is probably the biggest market in the world because it is open 24/7 and it accommodates players from different part of the world. However, the global Forex market is dependent on many factors outside the core currency markets despite its massive size. The Forex market is currently facing headwinds from the global energy markets as crude oil prices continue to fall. This piece looks at how the current weakness in oil prices is exerting downward pressure of some of the world's major currencies.
Crude oil prices remain depressed despite OPEC's best efforts
Crude oil has crashed to a 10-month low after falling 3% in the third week of June. Brent Crude oil is down 16.4% and West Texas Intermediate is down 17.7% in the year-to-date period – crude oil hasn’t fallen this much in the first six months of the year since 1997. The international Brent benchmark has broken down below the $45 support to trade around $44.47 per barrel. U.S. crude in the West Texas Intermediate is now trading $42.13 per barrel.
The main reason behind the unchecked drop in crude oil prices is that the supply of oil in circulation is more than the demand. OPEC is working hard to find a way reduce the supply of oil the market but the resilience of U.S. shale oil producers has almost rendered OPEC's efforts null and void.
Interestingly, investors are worried that OPEC is only making a half-hearted attempt to reduce the supply of oil. Investors believe that OPEC needs to deepen its production cuts or go on a production freeze if its wants to end the supply glut. Lynn Roy, a Lionexo commodities analyst observes that "crude oil is slipping like a knife through butter now, I've never seen the outlook for oil look this bad and the end is not in sight."
Here's how the continued weakness in oil could weaken currencies
The decline in crude oil is depressing many currencies and the weakness is particularly obvious in commodity-linked currencies such as Norwegian crown and the Canadian dollar. For instance, the Canadian dollar is down to a three and half-month month low to C1.3165 to the dollar.
The Norwegian crown declined to a 5-month low of 8.5456 crown to each dollar as crude oil continues to slide. The New Zealand dollar has declined 0.1% to $0.7332 and Australian dollar (AUD) declined 0.2% to $0.7562.
The U.S. dollar index declined 0.05% against a basket of currencies to 97.699 to reverse some of the gains it made earlier this month. More so, the weakness in oil prices has caused U.S Treasury yields to suffer a massive drop. Weak crude oil prices as exerts downward pressure on inflationary trends to further dampen optimism on U.S yields.
The more worrisome part is that indicators for reading U.S. inflation are weak and the continued weakness in oil could cause investors to lose faith in the U.S. energy market. The Forex markets will continue to stall because of the uninspiring outlook for oil. For one, forex traders and investors don't yet know the extent to which the depressed oil prices will upgrade into broad-based risk-off move. Interestingly, safe-haven currencies such as the Japanese yen is surging as the risk on fear about the price of crude weakens other currencies.