Forex Comment Apr 22

As oil debacle loses shock effect, dollar recedes

New US relief bill, improving virus news and benefits of cheaper crude occupying traders’ minds 

by Uwe Parpart
As oil debacle loses shock effect, dollar recedes
An oil pumpjack operates at dusk Willow Springs Park in Long Beach, California on April 21, 2020, a day after oil prices dropped to below zero as the oil industry suffers steep falls in benchmark crudes due to the ongoing global coronavirus pandemic. President Donald Trump on April 21 ordered his administration to come up with a plan to aid US oil companies struggling with a massive supply glut and record-low crude prices. "We will never let the great US Oil & Gas Industry down," Trump tweeted. Apu GOMES / AFP

(ATF) The WTI first-future recovery to $11.29bbl from bizarrely negative May futures prices that expired Tuesday is hardly worth the term recovery.

But traders in equities and other asset classes have by now come to realise that oil futures simply reacted to the same concerns over the depth and duration of the coronavirus' economic impact – albeit exaggerated by a lack of oil storage space.

No essential new information was gained. At least in part we saw a case of fear-driven circular reasoning.

With that realisation, focus returned to underlying basics, and securities and currency traders factored in the new $480 billion US relief bill to be passed in the Senate by Thursday, ongoing improvements in the virus crisis in most of Europe and Asia and - last but not least - the fact that low oil prices are a boon, not a bane for most of the world.

Equities rose across most of Asia Wednesday; Europe and US stock futures did the same. The greenback, in lower demand as risk aversion declined, fell in line with that. DXY dropped to just above 100 by 5pm HK time.

The People’s Bank of China took out a bit of insurance against a further dollar rise and set parity lower, at 7.0903, Wednesday morning. It proved unnecessary. At 5pm, CNY traded up at 7.0801.

The HKD we focussed on Tuesday continues to nearly touch the 7.75 level, the top of its trading band against the USD. As we pointed out, that's not a sign of real strength but of the higher cost on money in HK as economic and political risk is high.

The HK government reshuffle is widely interpreted as implying a tightening of Beijing controls and portending more political unrest once coronavirus clears out.