FxWirePro: Crude oil projections for 2018 and petro-bloc FX strategies

Crude oil seems to be in a higher range in 2018, the oil balance would likely constrict and inventories draw, on a likely 9-month extension of the OPEC-Russia accord and amid continued firm demand growth. The speed at which US shale responds will help determine whether crude hugs the top of the recent range near $60/bbl (central scenario) or shifts to a higher range that sees prices sustaining in the mid-60s (high price scenario).

An oil price breakout into a higher range is most meaningful for those currencies where output gaps have already closed and the central bank is normalizing.

Among petro currencies, CAD fits this description, and we pair a long here versus AUD, where iron ore has de-correlated with the broader commodity complex, where AUD itself has de-correlated from commodity prices, and where RBA is expected to remain on the sideline.

Thanks to the inflation data the upside in USDCAD was successfully defended. The Canadian inflation data for November surprised on the upside and gave an early Christmas present to CAD in the shape of a rally. The overall rate rose to 2.1% YoY. The different measures of core inflation paint a very similar picture. That means prices are rising after-inflation rates at the lower end of the Bank of Canada’s (BoC) target corridor had already led to concerns that the rate hikes in the summer could have been a policy error. In our standpoint, the BoC is not yet out of the woods: the BoC itself states that prices are rising due to temporary factors (e.g. petrol prices) and core inflation is rising only very slowly.

Long a 6m 0.9450 - 0.9120 AUD put/CAD call spread. Paid 0.74%November 21. Marked at 0.37%.