Commodities | Sep 04 2008
By Andrew Nelson
After surging as high as US$147 a barrel, a falling oil price was good news for investors around the world. It provided some much needed relief over the last little while. However, it looks like it’ll be a short term benefit, with Standard Chartered for one, saying the honeymoon with lower oil prices will soon be over as a gloomy global economic outlook tightens its grip.
Standard Chartered sees the recent performance of FX markets as giving a good insight into the tug of war going on between equity markets, commodity markets and currency markets. For as the oil price declines, the USD strengthens and this changing the dynamics behind global currencies, economies and markets around the world.
The analysts point out that while cheaper oil is good for oil-importing Asia, it has not helped Asian currencies at all, with slowing external demand and declining CPI on the back of retreating commodity prices starting to show a short-term weakening trend.
Latin American currencies are also coming under pressure, Standard Chartered notes, with increasingly risk averse investors selling out of emerging market currencies, adding to the difficulties presented by the resurgent USD. Mexico, in specific, is really starting to feel the pinch, as the country’s oil dependent economy is starting to lose traction pulling the peso lower with it.
But nowhere is this trend more evident than it is in Australia, with falling commodities being the major factor behind the AUD’s recent swift decline reflecting overall investor concerns about the weakening global economy. While the currency is expected to bounce back from the 82 odd US cents it’s at now, many think it will be a bit of a dead cat bounce, with the AUD expected to fall until commodities pick back up again.
We can all agree that a lower oil price, in general, is a good thing for both businesses and consumers, but with investors becoming more risk averse by the day, the global economic outlook, not falling oil prices, is beginning to take centre stage in media reports as well as on investors’ minds.