A sea of confusion

Here we go again

A century ago William Newton and Morris Goldberg invented the toggle switch. Today the price of oil has come to serve a similar purpose. In 1916 the switch was used to turn domestic lights and power points on and off: today's oil switch turns investors' risk-appetite on and off.

Things have come to the point where a two-dollar shift in the oil price can decide the relationship between the "safe" yen, franc and euro and the "risky" currencies, a group which now includes the pound. The argument is that falling (/rising) oil prices reflect reduced (/increased) demand for energy implying, in turn, a weaker (/stronger) global economy.

Investors have become acutely sensitive to the price of oil, more so even than they are to the movement of share prices on the Shanghai stock exchange. During the London session oil went up by three dollars and sterling went up by two US cents. The percentages were very different - oil's three-buck rally represented a 10% rise while two cents were worth less than 1.5% to the pound. However, on a chart of price over time the turning points and the gradient were uncannily synchronised.

Risk on

Although the global picture on Tuesday morning looked fairly glum ahead of London's opening it soon started to improve. Oil began to head back above $30 and equities followed it higher, prompting yet another move out of the safe-haven currencies.

Other than the NZ dollar, which lost its way after Australian inflation came in higher than expected, it was the Commonwealth dollars and the South African rand which felt most of the benefit of this renewed risk appetite. The Aussie and the rand gained 0.3%, the Loonie twice that much.

These on-the-fly changes in sentiment show just how jumpy financial markets have become. Over the last eight trading days the dollar price of oil was net unchanged, as was the sterling/yen exchange rate. However, on three of those days the yen was the best performer among the major currencies and on three it was the worst. 

Sniping opportunities

It looks very much as though the market has, collectively, not the foggiest idea what is going on. Anyone with currency to buy or sell should therefore make best use of their broker by placing limit orders to take advantage of spikes or troughs and using stop orders for protection against adverse moves.

In the coming 24 hours there are two obvious spiking and troughing possibilities. At 19:00 the US Federal Reserve is likely to leave its target range for the Funds rate unchanged at 0.25-0.5%. But it might not. At 20:00 the Reserve Bank of New Zealand is expected to keep its Official Cash Rate steady at 2.5%. But it might not.

A surprise increase from the Fed or a cut by the RBNZ would mean movement for the Greenback or the Kiwi. If you have skin in the game consider placing an order.