Fed on track for another rate hike even as oil prices slide – Westpac

Sean Callow, Research Analyst at Westpac, feels that oil prices could stabilize before too long which is likely to keep the Fed on track for another rate hike in H2 17.

Key Quotes

“The US dollar is quite mixed against G10 currencies over the past week, finding a little relief as US yields stabilized with help from a relatively quiet data calendar and range-bound equities. Dollar Index can probably grind a little higher near term, with the Bank of Japan pushing back against questions on an exit strategy, EUR/USD looking a little tired above 1.12 and GBP/USD printing 2 month lows despite some confusion over the Bank of England’s stance.”

“But to the extent that the US dollar relies on expectations of further Fed rate hikes in coming months, it is hard to be too bullish. Markets price only a 16% chance of the Fed hiking again at the 20 Sep FOMC meeting, despite influential NY Fed president Dudley sounding an upbeat note on the economy and warning that if the Fed did not continue tightening, there was a risk of “a very, very low unemployment rate” which could generate enough inflation to force the Fed to “slam on the brakes”.”

“The renewed slide in oil prices will make it easier for investors to ignore such inflation warnings near term. Brent crude oil slipped below $45/bbl for the first time since Nov 2016 i.e. before the 30 Nov OPEC agreement to reduce production. The disinflationary impact on headline inflation from the fall in crude oil prices will be especially strong in the US, where low taxes mean the wholesale gasoline price is more important than in say Australia or Europe.”

“Yet, increased US oil production is only partially offsetting the sharp decline in OPEC. This suggests oil prices could stabilize before too long. As well as helping keep the Fed on track for another rate hike in H2 17, this would take some pressure off commodity currencies in general, not just CAD (Australia is a net energy exporter given the importance of LNG). After a difficult couple of months for Australia’s commodity prices, some recovery seems in prospect.”