This week OPEC blinked and said they were worried about oil prices and ready speak to other producers to find ways to stabilize the market. Russia chimed and said it was ready to talk as well. This change in heart from the most important oil producing nations could set the stage for a commodity currency rally. Oil increased in price substantially after the news, although gave back much of the gains the next day.
It’s common knowledge that the currencies of countries heavily reliant on hydrocarbons for economic growth are somewhat correlated to the price of oil. With the collapse in the price of crude over the last several months, many of these economies have been dealt a severe blow and their currencies have reflected this economic stress. I’ve been saying that CAD, AUD, RUB, BRL are screaming buys at some point; however, timing is everything.
It seems to me that the catalyst that will move the price of crude higher will be some type of geopolitical event, like the Saudi invasion of Yemen last week which cause crude to spike. No one knows what will happen to cause this reaction; however, it doesn’t take much to take a guess at the cause.
Russia has now moved forces into Syria to prop up the Assad government and attack the Islamic State, a movement that Russia is very concerned about in the Caucasus on their southern border. Iran is about to buy a ton of weapons from Russia to cement its hegemony in the Middle East and has a nuclear weapon capability in the pipeline. ISIS is still taking territory and executing and raping thousands. Iraq is a weak shell of a state and is being overrun by foreign forces. Saudi is taking action in Yemen. Iran is still supporting Hezbollah in Lebanon. All of this activity still take place where the world gets the majority of its oil, in spite of the American shale oil revolution.
The Middle East is a powder keg waiting to blow. America has abdicated leadership in the region and all of the players holding a stake in the Middle East’s future are positioning for power. This is bound to lead to further conflict.
In the absence of such an event, China continues to weaken economically and could drag the price of crude back down to test the recent lows. If no conflict of consequence to the oil markets manifests itself during this retest, it seems to me that oil in the high 30s is the time to buy the commodity currencies. It’s highly likely that crude could base for a while in this area, just waiting for some type of catalyst to spike it higher.
If you need to own one of these currencies in the near future for payments or to cover any other type of obligation, it could be worth your while to start accumulating positions in this area. We are seeing extreme volatility in both directions in all major markets. This usually means that we are near a point of substantial change; ie, we could be putting in a bottom. Otherwise, keep your powder dry and wait for an entry point, when oil retests the lows.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Washington Times, Newsmax TV, and others. LToddWood.com