Dollar declines fail to support commodity prices

Friday, February 12, 2016

The offshore Chinese yuan exchange rate gained further ground against the dollar overnight, tracking much of the region’s equity benchmarks and currencies lower as the global sell-off showed no signs of stopping any time soon. With the closure of Chinese markets this week owing to the weeklong Chinese New Year celebrations investors have been unable to receive any cues from policymakers and central bankers at the PBOC with the yuan gaining ground against the greenback for the seventh straight session, trading towards 6.5264 yesterday. Dwindling foreign exchange reserves and global market jitters will likely see Chinese investors cautiously return to the market next week with concerns of further dumping of equities as the turmoil persists.

Front month WTI futures traded at their lowest level in twelve years yesterday as the US benchmark posted losses for the sixth straight session as the rout continues. Contracts for March delivery closed 4.7% lower yesterday, ending the session at $26.21/bbl after testing appetite for prices towards $26/bbl. Activity early on today has seen WTI futures recovery slightly, opening a dollar higher from last nights close but we expect the under pressure outlook to remain given the bearish fundamental outlook.

Stockpiles at Cushing, OK increased to record levels after adding 523K barrels during the week ending February 5th, much to the surprise of the market which had expected a 270K barrel drawdown. Stocks currently stand at 64.7m barrels and with capacity generally accepted to be around 73m barrels the current severely depressed outlook could persist for some time.

Ongoing dollar weakness bizarrely offered very little support to commodities prices this week and concerns of a market-to-real economy feedback loop could gain traction if the current dynamics persist. The greenback has lost roughly 1.5% against a basket of major currencies this week but this has failed to shore up support for dollar denominated commodity prices which extended declines this week, in the case of some base metals and crude oil towards fresh multi-year lows. Yen and Renminbi strength have played some part in the dollar’s declines this week and we’re hopeful that once Chinese market participants as well as policymakers in Beijing and the PBOC return with a refreshed outlook next week that markets will make a little more sense than they have this week.

CNH gains ground against dollar this week

CNH Curncy Offshore Deliverable 2016 02 12 08 01 01

Events for today

CN Market Holiday 

0700

DE

Jan

CPI

0700

DE

Q4

GDP

0930

UK

Jan

UK construction Output

1000

EZ

Dec

Industrial Production

1000

EZ

Q4

GDP

1330

US

Jan

Import Price Index

1330

US

Jan

Retail Sales

1330

US

Jan

PPI

1500

US

Jan

University of Michigan Sentiment

Topics: Crude oil, WTI, DXY, PBOC, CNH
More from: Kash Kamal