Saudi Oil Price Adjustment Adds to Growth Fears

As I reflect on the recent events in the foreign exchange market, it becomes apparent that stability prevailed overnight, following the release of the latest nonfarm payrolls report on Friday. Despite the report triggering a brief uptick in volatility, the overall impact on the market seemed limited. My observations led me to the conclusion that the Norwegian krone emerged as the most affected among G10 currencies at the onset of this week. The primary catalyst for this shift in dynamics was the sharp decline in oil prices witnessed the day before.

The intricacies of the situation unfolded as the price of Brent crude touched an intra-day low of USD75.26 per barrel. Reports surfaced, indicating that Saudi Arabia had reduced the official selling price for its flagship Arab Light crude by USD1.50 per barrel, positioning it at a premium to the Asia regional benchmark for February. My scrutiny of Bloomberg's analysis revealed that the USD2 per barrel reduction surpassed expectations, thereby lowering the premium over the regional benchmark to levels not seen since November 2021. This development amplified concerns among investors regarding softening global demand, particularly in the dynamic region of Asia.

Having witnessed the Norwegian krone's robust performance during the holiday period, I now observe it undergoing a corrective descent. EUR/NOK experienced a significant drop from its peak of 11.870 on December 13th to a low of 11.176 on December 27th, finding support at levels recorded during the summer of the previous year. The market dynamics are evolving, and the more risk-averse tone has also manifested in the underperformance of other G10 commodity currencies, notably the Australian and New Zealand dollars, during the overnight period.

A deeper dive into the AUD/USD rate reveals a retracement towards the 0.6700-level. Curiously, the Australian dollar failed to derive support from the yesterday’s release of a stronger-than-expected retail sales report for November. The data indicated a noteworthy 2.0% month-on-month increase in retail sales, nearly twice as strong as the Bloomberg consensus forecast. The Head of Business Statistics at ABS shed light on the matter, stating, "Black Friday sales were again a big hit this year, with retailers starting promotional periods earlier and running them for longer, compared to previous years." While this contributed to a boost in sales, it also played a role in the weakness observed in the prior month. October sales were revised lower to a more substantial contraction of -0.4% month-on-month. ABS further highlighted that shoppers may have expedited Christmas spending, typically slated for December.

Analysing the broader context, Bloomberg noted that despite the positive retail sales figures for November, the year-on-year increase was a modest 2.2%. This figure seems underwhelming, especially when considering working age population growth of around 3% over the same period and inflation above the target. Consequently, my outlook remains cautious, and I do not foresee the report significantly altering market expectations. Instead, it strengthens the belief that the Reserve Bank of Australia's next policy move is more likely to be a rate cut rather than a hike.

Delving into market sentiment, the Australian rate market anticipates the RBA initiating rate cuts during the second half of this year, a trajectory that lags other major central banks, such as the Federal Reserve. Notably, short-term yield spreads have been a consistent source of support for the Australian dollar in recent months.

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