Big Oil, Big Implications

Markets start the new week on a positive mood as the yen continues its retreat and US crude oil hits $81 for the first time since 2014. US and Canada aren't preventing FX from engaging in the classic carry trade, lifting AUD and NZD at the expense of JPY. DXY is closing in on a tightening wedge, which could set up for 94.90s or 93.50s. The Gold/Brent chart below will be closely watched on whether the weekly RSI will breakdown below 30.  

Lebanon offered a glimpse into the growing global energy crisis on the weekend as the entire country was plunged into darkness for 24 hours on the weekend. It's an increasingly complex situation as the nation struggles to cover and secure diesel for power plants.

Weekend reports also highlighted the growing coal shortage in India as two Northern states suffered rolling blackouts.

Households and companies in both places and elsewhere are frequently turning to diesel-powered generators to supplement or supply power. With natural gas prices at extraordinarily high levels, there is also large scale switching to oil when possible.

As a result, oil demand may be recovering more quickly than anticipated. On Friday, US oil hit $80 for the first time since 2014 and it continued higher early on Monday. Technically, there are blue skies on the chart up to significantly higher levels. The economic knock ons from that are negative and inflationary but for now the beneficiaries are oil-exporting currencies.

Notably, one level to watch is $86.90 in Brent. Unlike WTI, the global oil benchmark hasn't broken the 2018 high and still has $3 to go. A break of that level would confirm (or block) a genuine breakout. Meanwhile, Saudi Arabia is not exactly in a hurry to temper the windfalls of rising oil at a time when it's seeking diverse sources of revenue.

In Monday's broader trade, the trend of yen weakness appears to be gathering steam. It's an acknowledgement of the global reflation trade and rising yields.