Market expectations for ECB and BoJ to ease monetary policy further helping oil price rebound; highest correlation between oil and equity prices in 26 years; safe haven currencies top performers overnight

Market expectations for ECB and BoJ to ease monetary policy further helping oil price rebound; highest correlation between oil and equity prices in 26 years; safe haven currencies top performers overnight

Content supplied by BNZ Markets

The strong link between oil and currencies and equities continues, with lower oil prices overnight meaning weaker commodity currencies, a stronger yen and euro and lower equity prices.

The WSJ this morning leads off with an article highlighting the very tight correlation between oil and the S&P500 – over the last month-long period the correlation is an extraordinary 0.97, the highest correlation over the past 26 years, with the fear of weaker global growth being the most likely explanation for the tight relationship.

Overnight price action was fairly modest considering the way markets have behaved so far this year. Indeed, Friday was a big market-moving day, but I didn’t get a chance to write about it due to the Wellington Anniversary holiday. In that session, US and European equity markets were up between 2-3%, as oil rallied nearly 10%, capping a 21% two-day rally.

This rally was largely helped by expectations of further easing by the ECB in March, possibly further easing by the BoJ, and as traders scrambled to close speculative short-positions in oil and equities.

We’ve seen a partial reversal of Friday’s move, with oil prices down circa 4-5% and US and European equities down in the order of 0.5-0.6%. To put some figures on the recent oil move, Brent crude bottomed at $27.10 on Wednesday morning and peaked at $32.81 last night (+21% from the low), and currently sits at $30.91 (-5.8% from the high).

Safe-haven currencies head the leaderboard, with EUR/USD up 0.3% to 1.0825. Germany IFO expectations data mildly disappointed, following the disappointing euro area PMI data on Friday night.

USD/JPY is down 0.1% to 118.60. Recall that cross got to as low as 115.98 in the middle of last week when risk appetite was at its nadir.

Since then, we’ve had the strong risk-on move as oil bounced higher, and expectations of further BoJ easing have intensified as the Bank struggles to push inflation higher. BoJ head Kuroda gave no hints of further easing as he was interviewed on the sidelines at Davos at the weekend, making it unlikely to see any move when the BoJ meets at the end of this week, but some now believe that further easing in coming months is inevitable.

Reflecting the uncertain state of the global outlook than that policy view, net speculative positioning shows net bullish yen positions at their highest level in nearly four years.

CAD is the worst-performing major currency on weaker oil prices, with USAD/CAD up 0.8% to 1.4230, still well off the 12-year high of 1.4690 level reached mid last week. AUD/USD has tested 0.70 a couple of times, but is meeting some resistance at that level and sits down 0.3% at 0.6980.

NZD/USD is down 0.2% at 0.6480, about the level prevailing just before last week’s shocking CPI figure.

Considering some big moves in some currencies last week like JPY and CAD, the NZD has remained in a fairly tight trading range by comparison, ahead of the RBNZ’s statement on Thursday. A high of 0.6559 was reached Friday morning as oil began to take off, but it met strong resistance at that level and it just couldn’t push higher, even as oil pushed a lot higher and a risk-on sentiment developed. 

We expect a range of 0.6400-0.6550 to hold as we approach Thursday’s rate decision.


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