It was a very busy Monday for Oil traders as the market digested the news emanating from Saudi Arabia after suffering the sudden loss of 5.7m b/d of oil production, which marks the largest outage the market has ever seen in volume terms, surpassing the level from the Iraqi and Kuwaiti 1990 Gulf War. The CAD, NOK, but also a firm USD, were the outperformers while currencies the likes of the Euro of the Kiwi were punished the most. The market continues to be glued to any relevant update from Saudi Aramco that may clear up the key question mark to set Oil fair valuation, now heavily dependable on how fast can the Saudi restore its Oil output back to full capacity. Note, in line with the rather benign risk environment prior to the events in Saudi Arabia, do not mistake the attack as an admission that the forex environment should turn more risk-averse as the preponderance of technical evidence is not yet there, neither in equities, fixed income or in the performance of the JPY or CHF, with most of the safe-haven bids at the open of Asian markets in the latter two rapidly evaporating as the day rolled along. Currency traders will have to soon be expanding its focus as a line-up of Central Banks comes up, with most of the attention placed in the FOMC. It is precisely this high-impact event that may have helped to keep the USD bid off a critical support in the index, as the market is at risk of a less dovish forward guidance tone by the Fed amid firmer US fundamentals and the US-China trade war justifying extra patience, even if that view may now be challenged if we see an increase in geopolitical risks in the Middle East. An underpinning factor for the re-emergence of the USD buying interest is the development in the funding market, where we saw a massive jump in 3-month FRA/OIS spread (3m LIBOR vs overnight index swaps), which implies a spike in USD demand in the system.
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