Commodity prices have fallen sharply over the past few months, but some are unhappy with the decline in crude oil and OPEC may attempt to stem the drop on Friday. What are they planning on doing and how will this impact the forex markets, specifically AUD/USD?
Commodity prices have fallen sharply over the past few months, helping to alleviate inflation pressures in the global economy and allowing many central banks to move forward with much needed interest rate reductions. Indeed, on October 8, central banks including the Federal Reserve, European Central Bank, and Bank of England, among others, noted slowing price growth as one of the reasons why they were able to participate in the unprecedented coordinated rate cut. However, some are unhappy with the decline in commodities and more specifically crude oil, as prices have plummeted more than 50% from the record high in July of nearly $150 a barrel. This has sent oil producing nations into panic as they have become accustomed to the high prices and their government budget balances will be at risk if oil continues to tumble. In fact, Iraqi Oil Minister Hussain al-Shahristani said today that the country's budget for 2009 "is based on $80 a barrel, any fall beyond that is going to cause strain." This is the same story for many of the members of the Organization of the Petroleum Exporting Countries (OPEC), which includes Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, Angola, and Gabon. While some powerful OPEC nations like Saudi Arabia will face little impact from weaker oil as their budget is estimated to be based on a price of $55 to $60 a barrel, OPEC's emergency meeting on October 24 is expected to end with a production cut for the first time in nearly two years as they try to stem the commodity's rapid decline. Algerian oil minister and OPEC President Chakib Khelil has said that oil between $60 and $90 a barrel "won't worsen the global economic slowdown," but with most of the world's developed economies facing recession, many find this hard to believe. Such a move is likely to lead oil to bounce, though this depends on the amount of the reduction which is estimated to be anywhere between 500,000 barrels a day to 2.5 million, according to a report in the Financial Times. Furthermore, an oil-bullish result is in line with what the daily charts of WTI Crude Futures show us, as a falling wedge formation suggests we could see a reversal higher in the near-term.
WTI Crude Future Dec08 (Daily Chart) Source: Bloomberg
Likewise, the Reuters/Jeffries CRB Index - which includes energy, metals, and agricultural commodities - has faced steep declines since July 2008. However, the index is now holding above major support at 263.79, indicating that if we are to see any sort of short-term bottom, it should occur near current levels. Reuters/Jeffries CRB Commodities Index (Monthly Chart) Source: Bloomberg Turning attention to the forex markets, we've seen in the past that the Reuters/Jeffries CRB Index and AUD/USD hold a solid correlation, which helps to explain why the Australian dollar has fall so sharply over the past few months. In fact, Aussie has plummeted almost 60 percent against the Japanese yen as carry trades have been hit hard by market-wide risk aversion, while the currency has lost nearly 45 percent versus the greenback. Currency Performance Versus the Australian Dollar Over the Past 3 Months Source: Bloomberg The correlation also explains the trading of AUD/USD in a zone of key support between 0.6320 to 0.6600... AUD/USD (Monthly Chart) Source: Bloomberg ...and looking at the daily charts, it's clear that a consolidation is taking place. As a result, if we see that commodities bounce higher, perhaps helped along by an OPEC production cut on Friday, AUD/USD could rally toward 0.7000. AUD/USD (Daily Chart) Source: Bloomberg Written by Terri Belkas, Currency Strategist of DailyFX.com E-mail: tbelkas@dailyfx.com