CRUDE OIL’S STALL SPELLS BAD NEWS
DAVID MORRISON
CFD MARKET STRATEGIST, GFT
DESPITE assurances to the contrary, the US administration wants a weaker dollar. Investors have seen this, however, and discount US Treasury Secretary Tim Geithner’s call for a strong dollar as simply hot air. Meanwhile the clear message from the Federal Open Market Committee (FOMC) is that US interest rates will stay exceptionally low for an extended period.
These sentiments have supported the price rise in risk assets. Equities, precious metals and oil all moved higher as traders saw recent developments as a green light to continue with the dollar carry trade – selling “no yield” dollars in return for anything else that may give a return.
In addition, the US budget deficit ($176bn in the last month alone, and maybe just a few weeks away from hitting its ceiling of $2.1 trillion) has to be funded, and this requires a stunning amount of Treasury debt issuance. In this scenario the outlook for the dollar looks grim. But the US administration is betting that as long as the greenback’s decline is steady and orderly, it will help their economy to rebalance: imports slow, exports grow and inflation gradually takes care of the liabilities.
STRUGGLING OIL
So with the dollar all set up for a slow and protracted decline, we should continue to see further rises in equities, gold and crude oil. But crude appears to be stuck. Gold hit a new record high last week, yet oil is still struggling to push above $80 – well below its near-$150 per barrel record hit last year. Why might this be?
While there may well have been some speculative froth around that 2008 high, that wasn’t the only reason for the strength. Back then, oil was talked of as the major dollar alternative – the fact that it was difficult to store was offset by its economic and strategic importance.
Could it be that the rally in gold combined with the abrupt halt in crude’s advance is telling us something important? In my opinion, I think it is telling us that our economic prospects are dire. Gold is rising as investors lose their faith in all currencies – not just the dollar; but oil has stagnated because it just doesn’t believe in the recovery.