FX - Oil prices suddenly rose! Russia joins forces with Turkey to target the dollar

FXTForex Focus Globalforeign exchange marketSuddenly it was dangerous.

On the evening of September 5, the US dollar index rose sharply, rising to 104.84 during the session, setting a new intraday high since May 31; non-US currencies have plunged, among which, the Australian dollar against the US dollar exchange rate fell by more than 1.4% during the session, the euro against the US dollar fell by more than 0.7%, the pound against the US dollar fell by 0.56%, and the yen against the US dollar fell by 0.7%, setting a new low since November 7 last year; the offshore RMB fell below the 7.31 mark during the day

At the same time, there is also big news in the global energy market. According to the Saudi News Agency, Saudi Arabia will extend the voluntary production reduction of 1 million barrels per day by 3 months to the end of December 2023, a one-month extension period that exceeds market expectations. In addition, Russia also extended its oil export reduction measures of 300,000 barrels per day to December this year. Affected by this, on the evening of September 5, international oil prices soared, WTI crude oil rose by more than 2%, once rose to 87.59 US dollars per barrel; Brent crude oil also rose by more than 1.4%, now at 90.27 US dollars per barrel, touching 90 US dollars per barrel for the first time since November last year.

In addition, the "de-dollarization" that the market continues to pay attention to has also received the latest news. On September 4 local time, Russian President Vladimir Putin and Turkish President Erdogan met in Sochi. Erdogan emphasized the importance of using national currencies in bilateral trade with Russia, and revealed that the central bank governors of Turkey and Russia will hold talks to discuss specific steps to strengthen settlement in local currencies.

Global currency markets tumble

On the evening of September 5, the US dollar index rose sharply, rising to 104.84 during the session, setting a new intraday high since May 31; non-US currencies have plunged, including the Australian dollar against the US dollar exchange rate fell by more than 1.4% during the session, the euro against the US dollar fell by more than 0.7%, the British pound against the US dollar fell by 0.56%, the Japanese yen against the US dollar fell by 0.7%, setting a new low since November 7 last year; the offshore RMB against the US dollar fell below the 7.31 mark during the day.

On the news side, the Reserve Bank of Australia (central bank) announced on the 5th that it will maintain the cash target interest rate unchanged at 4.10% and the foreign exchange settlement balance interest rate unchanged at 4%, suspending interest rates for three consecutive times. Analysts pointed out that this may be the main reason for the plunge in the exchange rate of the Australian dollar against the US dollar.

At the same time, although the Reserve Bank of Australia has expressed the need to further tighten monetary policy and firmly restore inflation to its target level, the market expects that the probability of another interest rate hike is low.

In Europe, according to the latest data, the services PMI in the euro area fell below the boom-bust line in August, falling from 50.9 to 47.9, far below the market expectation of 48.3. At the same time, the services sector dragged the euro area composite PMI from 48.6 to 46.7, also lower than the expected 47.0, and hit a new low since December 2020.

Meanwhile, Germany's August composite PMI also fell sharply from 48.5 in July to 44.6%, the lowest level since July 2020.

A series of weak eurozone economic data, particularly from Germany, Europe's largest economy, has raised expectations that the European Central Bank will likely pause interest rate hikes later this month.

The continued depreciation of the yen against the dollar had something to do with Tokyo's latest statement after Shunichi Suzuki, finance minister, said the exchange rate should be set by the market and that sudden action was undesirable. He also said there was no clear sign that Japan would intervene in the market to boost the weak yen, even though its depreciation was driving up import costs.

In this regard, Shinji Takeuchi, the former head of the foreign exchange department of the Bank of Japan, believes that unless the exchange rate of the yen against the dollar falls below 150, which becomes a major political problem for Japanese Prime Minister Fumio Kishida, the Japanese government will not take intervention measures.

International oil prices suddenly skyrocketed

According to the Saudi News Agency, Saudi Arabia extended the voluntary production cut of 1 million barrels per day by three months to the end of December 2023, which greatly exceeded the one-month extension previously expected by the market. In addition, Russia also extended its oil export reduction of 300,000 barrels per day to December this year.

After the news was released, on the evening of September 5, international oil prices skyrocketed, with WTI crude oil rising by more than 2%, reaching a peak of $87.59/barrel during the day; Brent crude oil also rose by more than 1.4%, now trading at $90.27/barrel, touching $90/barrel for the first time since November last year.

Previously, Saudi Energy Minister Abdulaziz bin Salman had said that Saudi Arabia would take all necessary actions for the stability of the crude oil market.

At the OPEC + meeting in early June this year, Saudi Arabia unexpectedly announced an additional cut of 1 million barrels per day in July, the country's largest cut in years, bringing its output to 9 million barrels per day, the lowest level since June 2021. Saudi Arabia is the only OPEC + member with sufficient spare capacity and storage capacity to easily reduce and increase production.

Saudi Arabia began an additional voluntary production cut of 1 million barrels per day in July this year, and then assesses whether to extend the production cut plan month by month. Usually, Saudi Arabia officially announces whether to extend the additional production cut in the first week of each month. OPEC + will meet at the end of November to review the production policy for 2024.

Market analysts believe that Saudi Arabia has aggressively cut production at the expense of its market share to boost oil prices, mainly because Saudi Arabia needs oil prices of around $80 a barrel to maintain its huge budget and fund its economic transformation projects. Falling oil prices will put Saudi Arabia at risk, and its foreign exchange reserves have fallen to their lowest level since 2009.

The current three major global energy reports are all bullish on oil prices, citing OPEC + production cuts and strong demand. Previously, the EIA released its monthly short-term energy outlook report, expecting Brent crude oil prices to average $86/barrel in the second half of 2023, up about $7/barrel from its July forecast. The IEA believes that oil prices still have room to rise considering the tightening of supply caused by OPEC + production cuts. OPEC maintains optimism about oil demand this year and next.

In addition, according to EIA inventory data, the US EIA crude oil inventory plummeted by 10.58 million barrels in the week of August 25, and the inventory hit the lowest level since 2022. It is expected to reduce 1.5955 million barrels.

The dollar is under "air attack"

On September 4 local time, Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan met in Sochi, where "de-dollarization" became one of the focus topics of the market.

Mr. Erdogan stressed the importance of using national currencies in bilateral trade with Russia. "The central bank governors of Turkey and Russia will hold talks to discuss concrete steps to strengthen settlement in local currencies. In bilateral relations, this fact is very important from the perspective of the transition to settlement in local currencies."

Erdogan gave a positive evaluation of the development status of Turkey-Russia relations. He said that at present, the bilateral trade volume between Turkey and Russia has reached 62 billion US dollars and is moving towards the goal of 100 billion US dollars.

Putin pointed out that the use of the ruble and lira in commercial transactions between the two countries is becoming more and more active, and this trend is becoming more and more obvious. At the same time, the share of the dollar and the euro in settlements continues to decline.

Putin said at a conference on the same day that, despite open hostilities and illegal restrictions and sanctions from some countries, Russian energy companies have generally continued to develop, successfully finding new and reliable partners in the field of foreign trade and rebuilding logistics routes.

Despite their geopolitical differences, Russia and Turkey have been working to deepen economic co-operation, with Mr. Putin and Mr. Erdogan agreeing in April to encourage greater mutual investment and help Russian and Turkish companies access each other's markets.

In 2022, Turkey and Russia also signed an economic cooperation roadmap, which plans to increase bilateral trade to $100 billion per year. In addition, the two countries also agreed to introduce the Russian ruble as the settlement currency for bilateral trade, including the ruble for the settlement of Russian natural gas exports, and the Turkish side plans to use its own currency lira to pay Russia part of the payment.

As a result of Western sanctions, Russia has become the world's most aggressive "de-dollarizing" country, sharply reducing its holdings of US debt and dollars and increasing its reserves of renminbi and gold.