Oil prices are still dominating the scene

Outlook:

Whether we like it or not, oil prices are still dominating the scene. We wouldn’t have rising stock markets without it. We might not have a rising dollar index, either, although this runs counter to the inverse correlation story. Rising oil prices are the best hope for some inflation, any inflation, that the Fed can use to justify the June or July rate hike. We wish the Fed would come right out and admit it. Instead we get mealy-mouthed bumpf.

We got an antidote to the Fed’s “global concerns” from an unexpected quarter overnight—the BIS, The timing is good, a few weeks ahead of the G7 meeting of finance ministers and central bank chiefs on May 26-27 in Japan. The BIS head of monetary and economic affairs, one Claudio Borio, said the dol-lar’s dominance does pose a risk to the world economy but more diversification doesn’t make the world any safer—a higher number of reserves currencies wouldn’t affect the building of boom-bust imbalanc-es. This may seem too obvious to mention but let’s not underplay it.

Yes, the US gets an unearned benefit from having the dollar the reserve currency—cheap borrowing. The French are still gnashing their teeth. But the real issue with the dollar’s dominance is the Fed’s dov-ishness. “Easing begets easing.” Look at poor China, now saddled with excessive debt. And here’s the kicker: Borio said domestic policies should be set with an eye on potential global spillover effects as well as “more regular and deeper international coordination.” In fact, Cooperation could extend to occa-sional joint decisions, on both interest rates and foreign exchange intervention, beyond the well-honed responses seen during crises.”

Does this mean the BIS is advocating intervention as long as it’s coordinated? Yeah, maybe. And when it comes to the US-Japan, coordination is definitely needed. As noted above, early yesterday Japanese FinMin Aso used the magic word intervention—and today he used it again. This is a long way from the usual diplomatic references to undesirable excessive volatility. The market, especially in Asia, is hanging on his every word. We already have a rise to over 109, tantalizingly close to the magnetic round number 110, and possibly more, like the 114 level of late Feb-March.

Aso was not tap-dancing. He said Japan he is “prepared to undertake intervention” if the yen rose further and sharply. He also disclosed the MoF has been in talks with the US Treasury about the yen and Japan disagrees with the US stance. While Aso thinks a ¥5 rise in two days is excessive, the Treasury does not. Holy cow! Finance ministers never disclose private talks like this. Aso said “We have often been arguing over the phone.”

As for the US putting Japan on the fx monitoring list (seeking unfair competitive advantage), Aso doesn’t give a fig and it won’t change policy. Deputy BoJ Gov Iwata agreed. Aso was speaking today to the Upper House Audit Committee. He affirmed that if Tokyo intervenes, it will notify Washing-ton ahead of time.

Obviously the direct talk of intervention is credible. It’s still jawboning—no money has been spent—but after a long delay while the yen was being attacked, Aso’s timing is very good. Is it over? Yes, probably.

Now on to the other elephants in the room—Greece and Brexit. About Greece, the IMF refuses to take part in new deals unless somebody takes a haircut. Debt reduction is not negotiable. The Europeans, led by Germany and Finland, have been refusing a haircut. The latest agreements on the table still don’t amount to a haircut—as far as we can tell—so the German agreement to talk about extensions and rate cuts may not amount to a hill of beans. Greece can still default at the next big payment date in July.

Before then, the UK holds the Brexit referendum. As the NIESR says, sterling will likely fall by 20% if Brexit occurs, triggering high inflation and cutting GDP by 1% in the first year and 1.5-3.7% lower by 2030. Real wages will fall 2.2-6.3%. But if Britain stays in the EU, GDP will be up 2% this year, 2.7% in 2017 and 2.5% in 2018. Normally we imagine that voters are sensible when it comes right down to the wire—they vote their pocketbooks. The Scottish independence referendum failed largely because of recognition that the UK was paying a lot of the medical bill. But the UK can be a queer duck sometimes, bless it. We are not so sure that self-interest will rule. As some point the GBP is going to come under attack. As we know from long experience, fortunes can get made when the market goes gunning for sterling.

So here’s the picture—the dollar up with some robustness against the CAD, AUD and other commodity currencies for their own reasons. The dollar up against the yen on the threat of intervention. The dollar up against the euro and Swissie for reasons not fully known but probably linked to the widening differential in the US’ favor on the hint of a suggestion that the Fed is serious about a hike in June or July, and the CME Fed funds futures are just plain wrong. Nobody expect a dollar rally. Remember the CoT re-port show a massive short. This could get to be fun.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	109.20	LONG USD	WEAK	05/08/16	107.91	1.20%
GBP/USD	1.4439	LONG GBP	WEAK	04/12/16	1.4309	0.91%
EUR/USD	1.1381	LONG EURO	WEAK	03/11/16	1.1094	2.59%
EUR/JPY	124.28	SHORT EURO	STRONG	05/02/16	122.33	-1.59%
EUR/GBP	0.7881	SHORT EURO	STRONG	05/02/16	0.7864	-0.22%
USD/CHF	0.9738	LONG USD	NEW*WEAK	05/10/16	0.9738	-0.44%
USD/CAD	1.2945	LONG USD	NEW*STRONG	05/10/16	1.2945	0.00%
NZD/USD	0.6749	SHORT NZD	NEW*STRONG	05/10/16	0.6749	0.00%
AUD/USD	0.7350	SHORT AUD	NEW*STRONG	05/08/16	0.7354	0.05%
AUD/JPY	80.25	SHORT AUD	STRONG	04/02/16	81.17	1.13%
USD/MXN	18.0948	LONG USD	WEAK	05/06/16	17.9418	0.85%