SLR, Banks, Oil & USD

USD ends the week on a strong note against most currency on a combination of oil weakness and Friday's decision by the Fed to not extend the supplementary leverage ratio exemption granted to banks at the height of the pandemic. FX traders are increasingly watching the rapid improvement in the US yield spread relative to Germany and China, as it reaches its best level in over 6 and 3 weeks respectively.  Oil is up 2% after yesterday's 7% drop, which was the 3rd biggest daily % decline since the 30% crash of last Spring. We'll get plenty more Powell next week, as he will testify alongside Yellen about the CARE act policies. The charts below appear to support broadening signs of tightening financial conditions; from rising USD to surging yields. 

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Earlier today, stocks were dealt a mini shock, with USD gaining across the board after the Fed's SLR decision raised fears the banks may have to sell treasuries in order to improve their capital requirements. But the announcement seems to be a work-in-progress, with the possibility of reversing it in the event that conditions worsended.

Yields are somewhat stabilizing under 1.73%, after Thursday's overshoot set off an earthquake of selling in financial assets in yet-another post-Fed slump. The BOJ deserves some of the credit as well after details of the policy review leaked and indicated a 5 bps widening of the YCC band and a halt to ETF buying except in extraordinary circumstances.

The stretched trends help to explain the moves in both. WTI has rallied from the election-eve low of $33.64 to the March 8 high of $67.98 – a 102% rally.

Along the way, crude formed a tidy uptrend but it was shattered on Thursday. So how far could crude fall? The 38.2% Fibonacci retracement of the Nov-March rally is at $54.86 and 50% is at $50.81. Closer is the 55-day moving average at $57.17 with the 100-dma at $50.85.

None of those would be outside the scope of a healthy correction. If anything, they would ensure OPEC+ retains discipline even longer. Ultimately, a drop to $50 oil would be a sparkling opportunity because underinvestment and reopening demand will eventually tilt the market into a deficit but for now, discretion is the better part of valour.