The correlation of oil prices and the dollar is a rocky one
|Outlook: We get existing homes sales, PMI’s from several countries, and on Wednesday, durables and consumer spending. You’d think we’d focus on the US and European PMIs but we already know the stance of the central bank in both places, so probably not. The FOMC minutes might well be the star of the week, and if not, then Pres Biden’s Fed chief appointment news.
Plenty of commentary attributes the dollar gain on Friday to panic over Covid Wave 4, but we suspect the real source is three FOMC members seeming to propose or go along with accelerating tapering and thus an earlier rate hike. The three are Vice Chair Clarida, Gov Waller, and St. Louis Fed Pres Bullard, with Bullard aiming for tapering to end in March and Waller in April.
On top of that, there is a hint of a suggestion Pres Biden can replace chief Powell with Brainard, but that would be a dovish counterpunch to the now more hawkish Gang of Three, so nobody knows. In addition, we can still get a big growth slowdown in Q1 that will look worse on the m/m basis from the base effect alone, so it’s premature to speak of dovish//hawkish until we see how that plays out. We still expect the tapering announcement at the Dec meeting but it will be the amounts that the market will watch—it’s $15 billion per month now and ending in June, but could be more, or less.
Pres Biden is going to make a speech tomorrow about the economy and managing inflation. Oh, dear. Biden is certainly saner and a better manager than the incompetent predecessor, but presidents talking about the economy do not have a happy record in the US. Nixon and the steel industry might be ancient history but Trump and his tariffs are not, and in-between we have Reagan who was president when Volcker resigned. Bottom line, it’s never a good thing when presidents get involved, however noble the intention.
We have been warning for some time that we need to watch currencies when they get oversold, however valid the reasoning behind it. In the case of the euro, the ECB’s insistence that inflation is transitory (and fear of triggering a recession with a premature withdrawal) is the driving force, but even that can’t hold its finger in the dike forever.
Readers know we tend to dismiss the Commitments of Traders report because it’s out of date by the time we get it and also misleading, but Bloomberg reports “Investors are starting to believe central bankers who are adamant they’re in no rush to raise rates. Hedge funds’ bullishness toward the dollar is starting to evaporate amid speculation the U.S. currency has risen too much relative to the pace of any monetary tightening. Leveraged funds trimmed net long positions for a third straight week in the period through Nov. 16, according to data from the Commodity Futures Trading Commission. Even an interest-rate increase from the Bank of England next month looks like far from a done deal with officials tempering expectations over the weekend.”
We smell a correction coming. If hedge funds are paring dollar long positions, everyone else should probably do it, too, Besides, the oil price situation is at the height of uncertainty. We continue to wonder if the whole thing is not just jawboning to scare the traders and push prices down without actually doing anything, but it’s all too possible that Pres Biden will announce a release from the Strategic Reserve tomorrow in his talk on the economy, which will feature managing inflation. As for whether others make a simultaneous announcement remains to be seen, but if Biden can announce other are on board, including China and Japan, that’s all that would be needed—the Announcement Effect, wrapped in gold paper. The correlation of oil prices and the dollar is a rocky one, but this time a managed drop in oil prices is probably unfavorable for the dollar. Of course, we need to worry about “buy after the announcement,” too, the usual seemingly perverse order of things.
Meanwhile, worries about geopolitical showdowns are starting to dominate the airwaves. We even had an ancient Kissinger on TV yesterday. The consensus view is that Russia will not invade Ukraine and China will not invade Taiwan, but no one is convinced. As we need always to remember, the prospect of a shooting event is always dollar-positive. So, plenty of factors but we’ll go wit the chart—the dollar is overbought and some currencies, especially the euro, are oversold. Get out of the way.
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