Lower oil could surprise FX markets
Nov 11 (Reuters) -Lower oil could surprise FX markets where traders have prepared for the U.S interest rate to remain higher than was once expected and have bought many dollars in accord with this eventuality.
Oil has dropped $20/bbl from April's peak and is threatening the highly influential 100-MMA at $69.96, which lies at the base of ranges that have held for over three and a half years
Should prices drop convincingly below the 100-MMA, crude will probably fall much further, leading to a substantial shift in thinking about interest rates that will probably fall further and faster than is currently envisaged.
While all nations using crude oil will be affected, the focus of those trading currencies is predominantly on the dollar, and where the U.S. interest rate may head. In this respect, the expected base for the U.S. interest rate, which has recently risen around 100 basis point to 3.75%, could drop back to the low envisaged at the end of August, which was around 2.5%-2.75%.
If the extent of oil's drop is anything like those that have followed prior breaks of the 100-MMA, then expectations for how far the U.S. rate may drop could be much greater.
If traders were prepared for this change, the ramifications for currencies would still be significant, but given the size of current speculation on the dollar rising, a big drop for oil now could lead to rapid and potentially disorderly decline in its value.
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Brent targets https://tmsnrt.rs/3CmwTmt
Brent Crude oil https://tmsnrt.rs/40MvIHf
Jeremy Boulton is a Reuters market analyst. The views expressed are his own; Editing by Alison Williams
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