Trump shakes the oil market again
Investors remained on the sidelines after a long weekend. Markets were still closed in numerous countries yesterday (Easter Monday). On Tuesday, risk aversion remained elvated in the FX market with the Japanese yen and the greenback gaining ground against most of their peers following Donald Trump’s decision to end waiver for major importers of Iranian crude. USD/JPY tumbled 0.30% to 111.65 before bouncing back to 111.85. The US dollar rose the most against high quality commodity currencies such as the Aussie and the Kiwie (+0.34% and 0.33%). The single currency edged lower by 0.13% to 1.1243. Overall, the entire FX market has been trading within a tight range over the last few days as investors await further information regarding the potential slowdown of the global economy. The earning season, which just started, may provide some hint regarding the short to medium term outlook and could possibly reassure investors.
Crude oil prices, for both the WTI and Brent, continued to test higher grounds as market participants anticipated that the eight countries that benefits from the waiver would have to switch to other producers, which would inevitably drive prices higher. The WTI traded above $65 for the first time since late October last year, up 0.60% on the day, while its counterpart from the North Sea inched up 0.25% to $74.23 a barrel.
Unsurprisingly, Trump wrote in a tweet that “Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil.” Reading between the lines, we note that it will also benefit the US by driving demand for US oil higher. Iran produced slightly less than 2.7 million barrel per day in March and export around 1.3 mb/d. China import almost half of Iran’s oil exports, this is therefore highly likely that this country will get a waiver extension. The purpose of the US government is to force Iran to sat down to the negotiation table and accept the list of 12 demands before the US lifts sanctions. Given the fact that those demands go against 20 years of Iranian foreign policy, there no chance they will accepted. If Iran cannot exports a single barrel, it could block the Strait of Hormuz and hence disturb significantly the oil markets.
Concerns over inflation outlook weighs on INR
Losing close to 0.75% against the buck since last week, the indian rupee is facing further difficulties. The latest policy minutes of the Reserve Bank of India (RBI) provide a good insight of where monetary policy is heading while risks over oil and food prices make committee members worried.
The dovish-biased RBI second rate cut in April does not appear as a major breakthrough, although uncertainties on political stage as well as rising oil prices and potential oil supply shortages should rather favor a wait-and-see approach. Furthermore, the RBI is expected to inject further long-term liquidity worth $ 5 billion in the form of USD/INR buy-sell currency swap, the second similar operation in a month, a move that should accelerate rupee’s depreciation. It is therefore to question whether the INR will remain within the 69 range or whether it should go back towards February 2018 levels of 64. Indeed, although oil prices below $80 are not expected to disrupt consumer prices directly, the removal by the US of Iran oil waivers could weigh on the Indian economy. Iran is the third supplier of the country (11% of total supply) and Iran’s second largest buyer.
Hence, considering current circumstances it seems reasonable to say that INR vulnerability is there to stay. The dovish-bias adopted by the majority of RBI members, the outlook of another rate cut of 25 bps in June 2019 and risks over oil supply should have a negative impact on the indian rupee.
Currently trading at 69.72, USD/INR is heading along 69.86 short-term.
