Head of Commodity Strategy
The global rout in emerging market currencies continues apace with the USDTRY again attacking its all-time highs first reached overnight in a low-liquidity Asian session.
The Turkish lira is not the only EM currency showing notable weakness today, however, with the ZAR already having flash-crashed to over 15.50 versus USD overnight and the Chinese yuan sitting just shy of the crucial 7.00 USDCNY level as well.
These developments have seen the MSCI EM currency index fall to a one-year low and a continued decline will begin to pose a major challenge to global oil demand. A barrel of crude priced in TRY has now almost doubled since the beginning of the year while other countries increasingly also feel the heat despite the recent decline in the spot price of crude oil from its 3-1/2-year high.
For now the price of Brent crude oil continues to hover above key support with the expected slump in supply from Iran once US sanctions kick in being offset by the aforementioned risk to demand from trade wars, dollar strength, and EM weakness.
Funds were sellers of crude oil again last week with the 27,000-lot reduction in the combined Brent and WTI taking the net-long down to 732,000 lots, the lowest since October. Traders, however, remain unprepared for a continued drop with the combined gross-short in Brent and WTI at just 71,000 lots being close to the lowest seen during the past five years.
Brent crude oil has settled into a relative tight range between $71 and $75/barrel. Continued focus on Turkey and EM contagion raises the short term risk of further weakness, something the market is currently unprepared for.