Taking stock

With the slight lull in the market ahead of Thursday morning’s Fed meeting, it’s a good chance to review the trade strategies I have been following over the past few months.

Source: Bloomberg

Oil: rebalanced or overbalanced?

As expected, the oil market has begun to shift away from the US$20 handle to a more realistic handle in the mid-US$30s a barrel.

Reasons for the rebalance:

  • OPEC is showing signs of output growth slowing, with only Iran likely to expand output to pre-sanction levels
  • Non-OPEC nations are also showing signs of declines
  • US rig counts are at 2009 levels
  • Russia’s organic declines have only increased
  • Demand is showing green shoots of increasing – gasoline inventory declines were three-fold stronger than expected and China is on a spending spree in infrastructure


  • The supply ‘response’ is only just materialising and the OPEC-Russian freeze accord is yet to be ratified
  • China’s demand is only just increasing to levels seen in 2012, not to its high in 2013
  • Short-positioning in January was at record levels
  • Supply is still averaging one million barrels a day more than demand
  • Stock piling, while off record highs, is still well above normal levels

The rebalance appears to be partly based on the view that Chinese demand and OPEC freezes will rebalance the supply/demand equation.

However, that is clearly not the case and market saturation is more likely capping the price in the short term.

We maintain that oil will average US$35 a barrel in Q2 and that recent spikes above US$40 a barrel may be short lived as the fundamentals force the price back below this level (overbalanced).

In short, oil remains a volatile risk trade.

AUD’s perfect storm 

This trade is very much still intact and the Fed will make AUD/USD a focus. However, today’s Bank of Japan meeting makes the AUD/JPY the pair to watch.

Reasons why we think the AUD is appreciating:

  • Carry trade – AAA sovereign rating, a budget in relatively good shape and bond yields over 250 basis points ahead of global peers (in the case of Europe and Japan)
  • Commodity bounces – iron ore, oil and industrial metals have all shifted up
  • RBA rates – the cash rate is likely to be rooted to 2% despite calls to see it lowered. Economic data is showing green shoots and the run in the AUD after the Australian GDP figures is evidence enough that the bear call around the Australian economy may have been overdone. The other factor starting to creep in is Glenn Stevens tenure finishing up in September
  • China spending big on material and infrastructure making the quasi-China currency in the AUD hot property

The AUD’s more than 8% moves against the GBP, EUR and JPY are still showing strength. We see weakness in the AUD a chance to re-enter the long trade.AUD/USD is a risk ahead of the Fed on Thursday; we suggest assessing your positions after the meeting to avoid the likely whips.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.