Gas Price Retracement Settles Currency Markets

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Gas prices have fallen sharply since Russian President Vladimir Putin said Russia would significantly boost the supply of gas to the European market, a move that has settled foreign exchange markets.

Not only will the added supply from Russia put downward pressure on prices but the intervention pops any speculative excess that might have built in the gas market.

For the major currencies, the response is as we would expect: the Euro and Pound are recovering against the Dollar.

In a news piece out on October 07 Pound Sterling Live reported it appeared that the Euro was proving the more vulnerable to surging energy prices, given the exceptional advance in European gas contracts.

Putin said on Wednesday he would look to increase supplies to Europe beyond existing contractual obligations.

The impact on the gas market came not so much via the promise to increase supply but rather from the message itself: it came at the most opportune time, when frothy markets were most vulnerable to a countertrend development.

"These ferocious market dynamics seem characteristic of the usual froth around cycle peaks," says Yves Bonzon, Group Chief Investment Officer at Julius Baer.

Above: The price of the UK gas contract for November.

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With gas prices coming down notably over the past 24 hours the Euro is looking firmer:

At the time of writing the GBP/EUR has fallen back to 1.1747, having been as high as 1.17707 on Wednesday.

The EUR/USD is up at 1.1563, having been as low as 1.1529 on Wednesday.

The GBP/USD exchange rate is hovering at 1.3583 having been as low as 1.3532 on Wednesday.

Gas prices have had a notable impact on financial market volatility of late and the immediate outlook will depend on whether the worst of the surge in prices has already passed.

If this is the case equity markets can continue to recover, allowing pro-risk currencies to advance at the expense of the likes of the Yen, Franc and the U.S. Dollar.

Beneficiaries would include the Pound, Canadian Dollar, Australian Dollar, New Zealand Dollar and Emerging Market currencies.

"We are confident that the recent spike in energy prices is only temporary and that price pressures will ease in the coming months," says Bonzon.

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Julius Baer maintain that the global economic expansion has merely suffered a setback but remains well placed to continue.

They view the recent surge in energy prices the result of an "exceptional coincidence of wild cards, such as adverse weather events, boost energy demand and deplete supplies, nourishing shortage fears".

The surge in gas prices "is exemplary of the ferocious dynamics that occasionally unfold in commodity markets," says Bonzon.

"Prices should cool later this year, as the market’s self-healing mechanisms have kicked in," he adds.