Oil price down as hopes fade for coordinated policy effect on supply; GBP continues to be hit on Brexit concerns; NZD weakens to 200 day moving average as risk-off mood prevails

By Jason Wong

The safe-haven currencies of the Yen and Swiss franc have outperformed as markets shift back to a risk-off mood.  US and European equity markets are down in the order of 1-1.5%.

Oil prices are back in the spotlight, falling 4-5% as hope for some coordinated policy on supply by OPEC and non-OPEC members fade. 

Oil big-wigs are currently gathered in Houston for a conference and there were plenty of sound bites offered. Saudi Arabia’s Oil Minister Ali Al-Naimi said that the country wouldn’t cut oil production as other countries would be unlikely to assist in restraining output. However, he mentioned the proposed “freeze” at current production levels is the “beginning of the process”. Earlier, Iran’s Oil Minister said that it was “ridiculous” for Saudi Arabia to propose a production freeze when that country had already increased output. We think that it is inevitable that oil prices move back below the $30 mark soon, as supply continues to outstrip demand and inventory levels are very high.

Weak economic data added to gloomy market sentiment. Germany’s IFO business climate index undershot market expectations, falling to 105.7, led by the expectations component. US consumer confidence fell to a 7-month low of 92.2, well below consensus expectations of 97.2, and also led by a particularly weak reading for the expectations index. On a more positive note, existing homes sales data beat expectations, rising to their second strongest level in almost 9-years.

The Yen is 0.7% stronger against the USD, with USD/JPY back down to around the 112 level, while the Swiss franc is 0.9% stronger against the USD. 

EUR appears to have lost its safe-haven status, as it is dragged weaker by the pummelling being dealt to GBP, following increasing risk of the UK leaving the EU. While EUR/USD is only down by about 0.1% to 1.1020, without the Brexit concerns it would have tracked higher, in line with the Swiss franc’s move.

Following London mayor Boris Johnson indicating he was in the “Vote Leave” camp, GBP has come under significant pressure and the trend continued overnight. Adding to the GBP’s weakness, BoE’s Carney said that there was “considerable room” for additional stimulus of the economy needed it, although “it is not yet our judgement that [bank rate] could go negative”. GBP/USD traded down to as low as 1.4016 this morning.

Commodity currencies are weaker, with NZD under-performing AUD. NZD/USD is down 0.6% to 0.6665, close to its low for the day. This is pretty much right on the 200-day moving average, which is proving to be a level of resistance. Confidence in further RBNZ easing has risen over recent weeks, with NZ commodity prices continuing to fall, record low inflation expectations relative to target and the TWI holding up well above RBNZ projections.

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