• Oil price falls to a 6-year low
  • Commodity based economies in trouble
  • USD may rally after the GDP report release
  • AUD plunges after an export data

The US dollar rallied broadly yesterday – particularly against commodity-based currencies as crude oil prices fell below $44 a barrel for the first time since April 2009. The release of a government report, which showed an increase in US oil inventory to record highs for the week ended January 23rd, seemed to have triggered the price movement.

With no signs of immediate production cut by global oil producers, the crude oil prices are forecasted to go lower in the coming weeks. This will continue to distress commodity exporting economies such as Australia, Canada, Mexico and New Zealand.

jan-30 graph

Price is jointly determined by supply and demand, and in theory, the demand for a product should increase as the price falls. However, the falling oil prices and the buildup in oil inventory suggest that the demand for oil is lacking – suggesting that the global economy is not performing well. Supporting this case, the International Monetary Funds (IMF) recently revised their 2015 global forecast down to 3.5 percent from the 3.8 percent forecast in October.

A further slowdown in the global economy will put renewed pressure on the commodity based economies and their currencies. Meanwhile, lower oil prices are considered to be a net positive for US consumers and the economy. All eyes will be on this morning’s release of 4th quarter Gross Domestic Product (GDP) report to see if it can deliver another robust growth estimate and in so doing, further strengthen the dollar. Stay tuned.

EUR-USD is trading below 1.1350 ahead of the release of the 4th quarter US GDP report. The euro came under pressure yesterday after Germany reported that its inflation rate dropped to -0.5 percent year-over-year in January. This affirms the European Central Bank’s assessment that the Eurozone is close to sinking into deflation. Today, the January Eurozone consumer inflation data will be released. This should be interesting.

GBP-USD fell below 1.5100 yesterday when a retail sales survey came in lower in January than the previous month. The Bank of England Governor Mark Carney reiterated in his speech that the bank’s policy stance is to wait for some time before raising the interest rates.

USD-CAD settled over 1.2600 overnight and remains under pressure this morning as oil prices continue to trade near a 6-year low mark.

AUD-USD plunged overnight and is trading below 0.7800. The 4th quarter export price index showed no gain in export prices and continued to highlight the difficulty faced by an economy relying heavily on commodity exports for growth.

Have a great day!