Is the dollar set for another boost or is dollar strength over?
Investors eyeing the index that measures the dollar against its major peers are wondering if the currency has entered a new downward phase, a scenario that would give emerging markets some much needed breathing space.
The dollar index rose 7 per cent in the 17 weeks post mid-April. But in the last four weeks, it has fallen 1.7 per cent.
The market is split on the dollar. The bulls point to robust US data, comparatively weaker growth in other regions, the Federal Reserve’s consistent interest rate path, the continued impact of tax cuts and trade tensions as reasons why the dollar’s strength is far from done.
They also note how Fed governor Lael Brainard, regarded as a dove, has shifted to a hawkish stance by saying that government stimulus over the next two years would provide “tailwinds to demand” that required further gradual rate increases.
The bears say not all the data are favourable, citing the August core inflation numbers that were lower than forecast. They also suspect that Donald Trump will tone down his trade rhetoric after the November midterm elections and they remind investors that because of fiscal stimulus the US is running sizeable twin deficits.
US economy chart
“A budget deficit that’s heading towards $1tn at a rapid pace while the economy’s growing above potential is going to scare the FX market when the slowdown hits, as it surely will,” said Kit Juckes at Société Générale.
The Federal Open Market Committee is expected to raise rates at its September 26 meeting. Some analysts think it should hold fire and hold off from a December hike, but Stephen Jen at Eurizon SLJ said that given the healthy state of US equities and the latest strong jobs reports, “I cannot see how the FOMC could pause”.
The outcome of this dollar debate will be keenly felt in EM. A surprising rate rise from Turkey’s central bank provided some respite, but Mr Jen said he believed that further Fed tightening, coupled with slowing demand in China, meant that for EM “the worst may be ahead of us”. Roger Blitz
Can the Brent oil price sustain a rise above $80 a barrel
The oil market is suffering from altitude sickness. While the fundamentals of the market increasingly point to higher prices in the short term, with the International Energy Agency this week warning of a possible supply crunch once the US reimposes sanctions against Iran’s oil industry in November, Brent crude continues to struggle to break out of its well-defined $70-$80 a barrel trading range.
On Wednesday bullish traders briefly pierced the $80 a barrel level, getting within 50 cents of the high for the year. But rather than marching higher prices beat a quick retreat, like mountain climbers spooked by the effects of a lack of oxygen when scaling a Himalayan peak.
So what, if anything, can break the range that has been in place since April? Well the reasons for caution at the $80 a barrel level are multiple. That price level was one of the triggers back in May for US president Donald Trump to push Saudi Arabia and other major oil producers to add more supply to the market, partly to compensate for the looming loss of Iranian barrels. Further oil-related Tweets from the White House cannot be ruled out ahead of midterm elections in two months time.
$80 a barrel is also a level where fears of price-induced demand destruction become more acute, especially with many emerging market countries already facing near record fuel costs in their domestic currencies due to the violent moves in forex markets. In the background the rumbles of the US trade war with China give a longer-term reason to tread carefully.
But equally the pull back so far has been limited, with Brent looking to finish the week around $79 a barrel. Dropping down the mountain temporarily can be part of the acclimatisation process rather than an outright abandonment of the attempt.
The fundamentals of the oil market have a habit of winning out eventually. While markets are forward looking and have priced in a degree of the million-plus loss in Iranian barrels that are anticipated, it does not mean there will be no impact when the reality of renewed sanctions hits the market in November. Refiners will still end up chasing alternative barrels, no matter how comprehensive their forward planning.
With Venezuela’s output still seemingly in inexorable decline, Libya teetering and production growth in the US slowing, the IEA is forecasting a 500,000 barrel a day shortfall in the market in the last three months of the year, with demand reaching 100m b/d for the first time.
Another attempt at $80 a barrel should be expected in the coming weeks. The summit for bullish traders remains in sight. David Sheppard
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