Oil Price May Give Temporary Respite

Oil Price: There have been a slew of announcements over the past week or so that are negative for crude oil price, including US supply increases, a new JCPOA deal, and a sustained drop in demand from China. For all developed world countries that are not self-sufficient in crude oil or other energy sources, this bearish pressure will be extremely welcome.

Oil Price May Give Temporary Respite

This is particularly so for countries that are also suffering from the negative implications on their own currencies of a recent upsurge in the strength of the US dollar, in which crude oil is priced. For Japan, the local currency pricing effect of the rise in USD-denominated petroleum and other liquid products – which still accounts for around 40 percent of its total energy consumption, with another 20 percent or so coming from natural gas – has been profoundly damaging.

The Yen had already been under intense speculative pressure as global capital continues to flow to where it is best rewarded for the relative risks involved, and the Japanese government continues in attempts to boost post-COVID growth by keeping its own domestic interest rates low.

This negative sentiment for the Yen has been exacerbated by the safe haven appeal of the US dollar during the ongoing Russian invasion of Ukraine and compounded by the prospect of further interest rate hikes from the US Federal Reserve. These factors, and the rising inflationary pressure from still-high oil price, priced in US dollars but funded from Yen, saw a weakening through the key USDJPY125.00 psychological Yen support level very recently – a seven year low.

Oil Price May Give Temporary Respite

Although the currently more bearish tone for oil price may give the Japanese government some breathing room in the FX market, as all serious traders know it is not possible to ‘buck the market’ for long based on intervention alone, either verbal or practical.

For the Yen, the prospects are worsened firstly by traders’ innate and professional desire to test all artificial trading limits, and it appears that USDJPY125.00 remains a key Yen support level for the government. The next key Yen psychological support level after that is USDJPY130.00. This is regardless of protestations from the Bank of Japan’s Governor Haruhiko Kuroda, who has repeatedly stated that “a weak yen is generally positive for Japan’s economy.”

Second, the Yen’s prospects are worsened by technical factors relating to any intervention aimed at propping up its value. One of these complicating factors is that Japan’s finance minster himself would have to give the order to use the country’s USD foreign currency reserves to sell in order to buy JPY.

Although Japan has around USD1.38 trillion in reserves, it can disappear very quickly when trying to counteract the multi-trillion dollar daily FX market. As Nelson Bunker Hunt famously once said when he had tried – and failed – to corner the world’s silver market: “A billion dollars just ain’t what it used to be.”

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Oil Price May Give Temporary Respite via @marketinvestor
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