Dollar's Turn?
Ed Yardeni | Apr 21, 2015 02:56AM ET
On balance, there still looks to be more stagnation around the world than either a boom or a bust. So how can we explain the remarkable rebound in oil prices in recent weeks? The nearby futures price of a barrel of Brent crude has risen from its recent low of $45.59 on January 13 to $63.45 on Friday.
That’s despite record production by Saudi Arabia, all-time highs in crude oil inventories, gushing US oil production, and the possible end of sanctions against Iran. Could it be that the global economy is improving more than widely recognized? I doubt it. There’s certainly no confirmation of this possibility in the CRB raw industrials spot price index, which continued to edge lower last week, and now is the lowest since February 2010. This index does not include any petroleum or lumber commodities.
The apparent bottoming of oil prices is coinciding with the apparent peaking in the trade-weighted dollar. Previously, I’ve often observed that the two are highly inversely correlated. The dollar may be peaking on expectations that the Fed’s policy stance over the rest of the year is more likely to be “one-and-done” or even “none-and-done” than normalization, notwithstanding the recent upbeat views of two Fed officials (Stanley Fischer and Bill Dudley) about the US economic outlook. I am in the one-and-done camp for now.
The strong correlation may occur because rising (falling) oil prices increase (decrease) the dollar revenues of oil exporting countries. Many of them prefer to diversify their currency holdings so when they get lots of dollars, they tend to convert them to other currencies, which weakens the dollar. The reverse happens when they earn fewer dollars on their oil exports.
The currency markets are turning bullish not only for oil but also for other commodities, suggesting that there may be mounting expectations of better global economic activity. A few of the commodity currencies--i.e., the Canadian dollar, Brazilian dollar, and Russian ruble (thanks to the oil price rebound)--have been rallying in recent days. However, that’s after significant selloffs over the past year or so. On the other hand, the AUD/USD and the South African rand have simply stopped falling in recent days.
Today's Morning Briefing: Uneven Growth.(1) Ups and downs in IMFs latest forecast. (2) Redistributing the same growth. (3) Draghi’s push. (4) Rising in the EZ: production, exports, and car sales. (5) Fischer and Dudley expect more. (6) Weakening in the US: production, orders, and starts. (7) Stepping on the gas and the brakes in China. (8) Data suggest massive capital outflows from China. (9) India is looking up, while Brazil is looking down. (10) Industrial commodities yet to confirm oil’s rebound. (11) Has the dollar peaked because oil has bottomed, or vice versa?
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