FX, Bond Yields & Oil Prices

by Ashraf Laidi
Mar 10, 2009 18:22 | 12 Comments

Oil gains 40% from its February lows, trading at $47.47, and $1.00 below its 100-day moving average, a trend that hasnt been broken since August 2008. The simultaneous advance in US bond yields along with oil prices may appear unusual given the erosion in global economic growth. But it is all about supply as increasing supply of US borrowing (another weekly batch of +$60 billion in US Treasury auctions) and mobilized stocks of US crude oil constitute the main forces behind the ensuing price dynamics in Treasuries and WTI. WTI eyes $51.00 as the next key target, while 10-year yields have yet to breach the 3.05% level.

While the notion of rising US bond yields and a falling dollar may sound counter intuitive to those who firmly believe in the direct yield-FX relation, such is not the case when bond yields are driven up by increased borrowing rather than increased growth/inflation expectations. In the case of crude oil, the WTI benchmark has now resumed its more normal pricing of reclaiming its premium above London Brent, after being priced at a discount since November. Sundays upcoming OPEC meeting may be a decent excuse for rising oil prices, but the escalating supply builds at the Cushing hub have finally triggered orders from refineries at prices not seen since 2003.

FX, Bond Yields & Oil Prices - Bondsoilusdmar10 (Chart 1)

The implications of rising oil prices and US bond yields are USD-negative, especially if the ensuing bear market bounce in global equities extends ahead. As this takes place, markets start using the growth argument to rationalize the rise in oil prices and bond yields, which would only accelerate USDs sell-off against non-JPY currencies. A temporary return to risk appetite defined as no more than 25% rally in equities (see charts below) could subject the USD to particularly hefty losses against AUD (0.68), EUR (1.31) and NOK (6.60).

FX, Bond Yields & Oil Prices - Stockbounces Mar 10 (Chart 2)



FX, Bond Yields & Oil Prices - Stockbounces 2000 Mar 10 (Chart 3)

Finally, jump in risk appetite comes as no surprise to a market standing at 16-17 yr lows in the major US indices, lacking major US economic data and providing bottom pickers to mount what may be the first real signs of a bear-market raly since January. While pundits are discussing the importance of closing above 700 in the S&P, the next major resistance stands at 775, followed by 805 until we're likely to see renewed downside. As signalled in today's morning IMT, Aussie and Nokkie respond best to today's rally (see AUDCHF in today's HotChart), while GBPUSD sends a negative signal by failing to close above $1.3850 in London trade. Such a failure in NY close would cast prolonged negative dynamics on GBP.

While last week's feature article highlighted the deteriorating fundamentals in the Canadian dollar, todays piece reiterates the case for the Australian dollar, which appears set to exploit any advances in risk appetite as the currency is characterised with superior structural foundation (lowest external deficit in 7 years, lowest budget deficit in G10. Readers of my HotChart section have seen an array of calls favouring AUDCHF, AUDJPY and AUDCAD. The Aussies strength was also manifested in the currencys out-performance of the CAD, NZD and GBP during bouts of risk aversion (falling stocks).

My Book is now ranked # 2 on Amazon's Foreign Exchange and Finance categories. Thanks for all of you got it, and go ahead for those who haven't done so !

Comments (Showing latest 10 of 12) View All Comments
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Feb 18, 2011 19:13
Said, what is the point of your comment? How's that related to this forum?

I appreciate your constant posts on the forum, But as I said last week, can you keep your comments relevant to the markets. It is ok to shed your thoughts on other matters once in a while, but to continuously post your ruminations about matters that hardly anybody seems to understand is neither helpful to the other members nor to you. I am once again asking you to stick to the markets, as many forum members have complained.


Ashraf
said
mulhouse, France
Posts: 2822
9 years ago
Jan 31, 2011 8:49
hi djellal
what is happening in veveux and nespresso? fun.
Posted Anonymously
9 years ago
Jan 29, 2011 16:25
isi
marbella, Spain
Posts: 4
10 years ago
Mar 16, 2009 18:01
Russia now produces more oil than Saudi Arabia! All producers call for oil reduction to shore up prices, and then pump it out as fast as possible to meet their financial demands. There is a glut of oil in the market and increase of almost 10% above mean in stored reserves. The news that comes out daily, clearly shows that the end to the crisis is nowhere in sight (the politicians and the Fed., who HAVE to take an optimistic view, now talk about 2010). In the real world, once sees the effects of the crisis accelerating in the high street, on businesses and on peoples spending habits. Most oil producing countries have budgets for 2009 based on 80 dollar oil. Saudi Arabia may get tired of being virtually the only country that cuts production (they now have a capacity to produce more than double); countries like Iraq need urgently to increase their production and are actively seeking measures to do so. All the above seem to indicate that we will see down pressure on oil prices over the next couple of years.
A lower oil price seems to be supportive of a stronger dollar.
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Mar 14, 2009 12:46
Baleal, If we expect stocks to rise further,then EURUSD should up not down. $1.33 could re-emerge.

Ashraf
Baleal
Portugal
Posted Anonymously
10 years ago
Mar 13, 2009 18:05
Hi Ashraf

EURUSD is moving with SP 500, so probably when SP500 reach 850 (more or less) EU will drop. Wich will your target for this movement up on EU?

Thanks and best regards
Rob
New York, United States
Posts: 305
10 years ago
Mar 13, 2009 14:48
Hi Ashraf,

How will rising risk appetite affect Gold? Do you see short-term weakness in Gold due to equity strengthening and perceived recovery, or do you see strength in Gold due to a weakening USD. Thanks
FL
GuangZhou, China
Posts: 14
10 years ago
Mar 13, 2009 5:23
ok it's clear Thanks Ashraf, we're looking for the future Subject.
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Mar 12, 2009 21:40
FL, EURGBP uptrend is slowing. Better now to consider going long EURUSD and GBPUSD. See latest IMT.

Ashraf
FL
GuangZhou, China
Posts: 14
10 years ago
Mar 12, 2009 5:04
Thanks Ashraf,

what about EUR/GBP, Since 0.8860 Upward tendency Whether you did think Can also continue Path 0.9500 or Higher. Between the British national debt and the German national debt's returns ratio presents negative value whether also to mean anything
Words which looking from the intermediate stageWants to listen to you from the fundamental plane and on the technical surface suggestion.

Regards,
Francis Liu