Currency Market Analysis

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Apr 03, 2020 | Currency Market Analysis

Global Themes

Oil volatility sends shockwaves through markets

• Oil prices soar on hopes of supply cut
• US non-farm payrolls takes centre stage
• Sterling usually storms through April

Oil Prices

Oil prices soar on hopes of supply cut

A barrel of Brent crude rallied over 30% yesterday on hopes that Saudi Arabia and Russia will agree a supply cut. The currencies of oil exporting nations jolted higher as a result, with CAD and NOK strengthening across the board.

Earlier this week, oil prices hit their lowest level in eighteen years due to the double impact of the coronavirus epidemic that has reduced fuel demand and a price war between the major producers, Saudi Arabia and Russia. Then, US President Donald Trump hit the wires saying he was confident the major oil producers would agree a production cut of 10 million barrels a day. Brent crude jumped a staggering 900 pips in just a matter of minutes, from $27 to $36 a barrel. Shockwaves were sent through currency markets too, with GBP/CAD losing two cents in half an hour. However, a host of political hurdles await any kind of deal, especially considering Saudi Arabia and Russia have shown little sign in agreeing a shift in current strategy so far and therefore oil prices and commodity currencies have retreated from yesterday’s highs.

• Even if a production cut is agreed, the global oil demand collapse is so extreme, because of global lockdowns and travel bans, that any supply cuts from major producers may only have a limited impact on prices.


US non-farm payrolls takes centre stage

Yesterday, the number of Americans filing for first-time unemployment benefits soared to more than 6m, reaching a record high for the second consecutive week as lay-offs accelerate. At 1:30pm, the highly anticipated US jobs report is on the docket and economists expect a dismal number. Though counterintuitive, this could strengthen the US Dollar if risk sentiment sours and investors favour the safer, more liquid dollar.

The shutdown of businesses across the world is of course harming economies, but in the US, the accelerating number of jobless claims into new industries is unnerving to say the least. Initial jobless claims spiked to 6.65m in the week ending March 28, smashing median forecasts for a rise to 3.7m. This takes the 2-week total to 10m jobless claims, already half the amount estimated by Oxford Economics for the coming weeks. The upcoming jobs report for the month of March is unlikely to reveal the full impact of the virus given the much of the data was collected prior to the imposition of social distancing measures.

• Forecasts call for a loss of 100,000 jobs in March and unemployment expected to rise to 3.8% from 3.5%, the lowest level in 50 years.


Sterling usually storms through April

Given the current health and economic crisis, it may be unwise to follow historical patterns in the market, yet April has often proved a positive month for GBP/USD. A seasonality study by Reuters shows that each April since 2000 has seen GBP/USD rise 16 of the past 20 years.

Why is this usually the trend? It is argued that flows at the beginning of the UK’s financial year tend to be positive. The pound has started the month off modestly upbeat but remains nearly 7% down on the year at time of writing. Though the currency pair hit a 35-year low last month, it also staged its best 1-week performance on record last week, climbing a huge 6.85%. This could be interpreted as a signal of further upside to come, alongside other technical indicators suggesting this momentum could be sustained if this week closes out above $1.2464.

• Seasonality should not be considered in isolation, which is why it’s important to reflect on these other technical indicators and of course the main factor driving markets – the infection rate of Covid-19, the lockdowns globally and subsequent impact on economies and exchange rates.

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