by Dave Evans of binary.com
This week, oil prices (West Texas Intermediary) slumped to a four year low after OPEC opted to keep oil production steady instead of cutting it, as the body often did at previous meetings during times of pricing pressure.
Oil Prices Daily (WTI)
The move caps a sustained period of selling pressure over the Autumn. The world economy has hardly been booming during this period and for once, it seems that professional commercial buyers have not stepped up to the plate.
We could have further to fall, as November and December have both historically averaged oil price declines of around 2% since 1983.
Oil is not alone in the commodity market for feeling the pressure. As with most commodities listed against the US dollar, there has been a strong inverse correlation between prices and the US currency.
Correlation does not equal causation, but the US dollar’s rally has been helped by a lack of pull in the other direction from commodities, while commodities have been pressured by the pervasive strength of the dollar.
US dollar index
The dollar index advance has paused somewhat as we near the end of November, but so far the uptrend seen since the beginning of June has shown no serious signs of reversal to date.
Oil and its correlation with the GBP USD and the USD/JPY
The chart above shows the weekly chart of oil with the correlation with the GBP/USD (Purple) and the USD/JPY (red). We can see that oil has had a strong positive correlation with the GBP/USD (and indeed most dollars) and a strong negative correlation with the USD/JPY. This implies that a down move is currently corresponding with a down move in the likes of the GBP/USD. At the same time, an up move in the USD/JPY is corresponding in a down move in the price of oil.
Once again, this correlation does not equal causation, but it does underline the centrality of the US dollar to the major market trends of the moment. Until the US dollar significantly reverses we’re unlikely to see a corresponding rise in oil prices, the GBP/USD or a fall in the USD/JPY.
Yen Troubles Not Over Yet
The USD/JPY lifted higher again on Friday after a short period of respite for the yen this week against the dollar. This was until the latest blow for ‘Abenomics’ landed early Thursday/ late Friday with Japanese core inflation falling below 1% last month. This comes ahead of snap elections as Japanese PM Shinzo Abe aims to garner support for delaying a scheduled tax rise.
USD/ JPY Daily Chart
With the US dollar showing no signs of a serious reversal and the Japanese yen unlikely to gain real strength until after the elections, we could see yet more upside from here for the USD/ JPY.
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