March 22nd Fundamental Facts

The Dollar made a significant recovery overnight, showing resilience amidst a surge in risk-on sentiment that pushed the three major US stock indexes to all-time highs. The greenback continued to make gains in the Asian session, surpassing pre-FOMC highs against European majors.
The change in sentiment occurred following SNB’s unexpected rate cut yesterday and a dovish voting pattern from the BoE. These events could have led investors to understand that there are realistic risks that the Fed could start reducing interest rates later than other major counterparts like the ECB.
At present, the Dollar is the strongest currency of the week, outperforming the Canadian Dollar and Euro. On the other end, the Swiss Franc is the weakest performer of the week, with the Japanese Yen not doing much better. The New Zealand Dollar and British Pound are also under pressure, while the Australian Dollar maintains a neutral position within the currency mix.

Global petroleum stocks are just marginally below the long-term seasonal norm, but futures prices have already shifted into a sharp backwardation as traders predict further depletion throughout 2024. The OECD’s commercial inventories of crude oil and refined products are estimated to have been around 75 million barrels, or 3% below the previous ten-year seasonal average at the end of February.
The U.S. Energy Information Administration’s “Short-Term Energy Outlook” indicates that the deficit has remained relatively stable since March 2023, despite significant fluctuations in spot prices and calendar spreads. Additional production cuts by Saudi Arabia and its OPEC+ allies have been counterbalanced by faster-than-expected growth in non-OPEC production, primarily from the United States, Canada, Brazil, and Guyana.
Despite the ongoing slowdown in manufacturing and freight activity across North America, Europe, and China, petroleum consumption has consistently increased in line with its long-term trend. Front-month futures prices for the benchmark Brent contract have averaged around $84 per barrel so far in March, almost exactly in line with the long-term average since the start of the century, once inflation is taken into account.
Nearly all the price increases have been concentrated in the contracts nearest to delivery, with little or no change in prices for deliveries in 2025 and beyond. The relative increase in nearby futures prices has pushed the market structure into an increasingly steep backwardation. Front-month prices have traded at an average premium of almost $4 over contracts for delivery six months later so far in March.
Such a steep backwardation would normally be associated with inventories that are already low and rapidly depleting. However, in this case, traders seem to be anticipating a much larger depletion of inventories over the rest of the year rather than any current tightness in the market. Traders are reacting to signals that Saudi Arabia and its OPEC+ allies will extend their cuts through the middle of the year and beyond, even if consumption remains robust and inventories draw down significantly.
Saudi Arabia and its closest allies have accepted a smaller share of global production to support prices at a higher level and this calculation is expected to be maintained for the indefinite future. Production cuts will only be reversed “subject to market conditions”, OPEC announced on March 3, in other words when consumption is strong enough that output can be increased without lowering prices.
Saudi Arabia’s willingness to extend its voluntary production restraint has removed much of the downside risk from oil prices despite uncertainty about the outlook for the global economy and interest rates. By March 12, hedge funds and other money managers have boosted their net position in futures and options linked to Brent and U.S. crude to the equivalent of 379 million barrels.
Portfolio investors remain cautious about prices increasing further, at least until there are clearer signs of a recovery in industrial activity, but are no longer so fearful of them declining again. One way or another, however, the current contradiction between average spot prices and a strong backwardation will have to be resolved. If global inventories deplete as much as the strong backwardation implies, spot prices are likely to rise over the course of the year and very likely to exceed $90. But if the market remains comfortably supplied, as the current level of spot prices implies, the backwardation will gradually ease.

China’s central bank hinted at a possible increase in liquidity for banks, but remained wary about reducing interest rates, following a positive start to 2024 for the world’s second-largest economy. The People’s Bank of China’s Deputy Governor, Xuan Changneng, stated in a briefing that there is still scope to decrease the reserve requirement ratio for banks, a crucial tool for adjusting liquidity. He also mentioned that as deposit rates continue to fall and other major global economies lean towards easing, the country’s interest rate policy could become more “independent”. This was a reference to the current constraints posed by banks’ slim profit margins and the Federal Reserve’s high rates.
Xuan emphasized that China has ample monetary policy space and a rich policy toolbox, and that the financial support to the economy remains robust. These comments indicate that the PBOC is not in a hurry to reduce rates at the moment, as it is likely to lower the RRR this year and monetary policy continues to be relaxed. Official data showed better-than-expected growth in the export, industrial, and investment sectors in the first two months of the year, allowing policymakers to pause easing measures and evaluate growth momentum.
Zhang Zhiwei, the chief economist for Pinpoint Asset Management Ltd., suggested that a rate cut might be postponed due to concerns such as increased pressure on the already weak yuan and China’s flattening yield curve, which indicates growing trader pessimism about the country’s long-term growth prospects.
Raymond Yeung, the chief economist for Greater China at Australia & New Zealand Banking Group Ltd., anticipates that banks will reduce their deposit rates in April. This would alleviate the strain from their shrinking profit margins and create room for lending rates to decrease. He also predicts a cut to the RRR in the second half of the year.
Xuan’s comments follow remarks made a few weeks earlier by PBOC Governor Pan Gongsheng, who emphasized that there was still scope for the central bank to reduce the RRR, thereby enabling lenders to maintain smaller reserves and promote lending. Neither provided any indication of when another reduction might occur. In January, Pan announced a larger-than-expected 50 basis point reduction in the RRR during a live press briefing.
Earlier on Thursday, Chinese state media reported that policymakers were in an “observation period” after the economy demonstrated strength in the first two months of the year. Investors have been closely examining statements by Chinese policymakers for any hints of potential stimulus measures this year. Beijing is aiming for a growth rate of around 5%, a target that some analysts believe may necessitate additional support.
Xuan indicated that the PBOC is currently satisfied with the growth of credit and money supply and will maintain sufficient liquidity, even though loan expansion was at its slowest recorded rate in February. He clarified that a credit growth of at least 8% aligns with the nominal economic growth target of about 8%.