Oil and the Dollar Dominate the Economic News
The price of oil whip sawed this week after a meeting of oil producers in Doha, Qatar failed to produce a production freeze agreement. Saudi Arabia insisted that its participation in any oil production freeze needed to be coupled with agreements of the other oil producers to freeze their production. Iran has recently begun to export larger amounts of oil, especially to Europe since sanctions were lifted on it earlier this year. Iran has stated it is not in favor of a production freeze. As a result of this position, no freeze was agreed. Iran added that it encouraged the other oil producers to continue talks that would result in a production freeze even though they would not be interested in participating.
The next meeting of oil producers is the bi- annual OPEC meeting on June 2.
The price of oil dropped over 6% at the beginning of the week on news that there would be no output freeze agreement. The price fell in to the mid to high $30’s but rebounded to over $41 a barrel on news of a Kuwaiti oil workers strike that shut down 60% of that nation’s oil production.
The dollar continues to get hammered in the wake of the Fed’s volte face re their intention to raise interest rates four times this year. Fed officials have tried to talk up the possibility of an imminent rate hike, but the market has seemingly grown tired of the Fed crying “rate hike” and has discounted the possibility and sold dollars. The Dollar Index* has traded in the 93-94 range all week.
Saudi Arabia Threatens to Dump U.S. Treasury Bonds
Adding to the dollar woes this week was an explicit threat by Saudi Arabia to dump its substantial U.S. Treasury bond holding if the U.S. Congressed passed the 9/11 bill that would allow U.S. citizens to sue Saudi Arabia for any participation in the September 11, 2001 terror attacks. The U.S. has warned Saudi Arabia that such a move would not be in the best interest of Saudi Arabia. President Obama has also said he would not sign the 9/11 bill if Congress were to pass it. Since the Saudi threat, House Speaker Paul Ryan and other members of Congress have openly questioned the efficacy of the bill when balanced against the United States’ strategic relationship with Saudi Arabia.
Saudi Arabia’s threat to dump her U.S. Treasury Bonds highlights that the United States has trillions of dollars in debt outstanding to foreigners who may use their Treasury holdings as leverage to influence U.S. policy. This has the potential to undermine confidence in the dollar, generally and specifically if Saudi Arabia or another large holder such as China or Japan who each hold over $1 trillion Treasury Bonds, decide to sell large portions of them.
The Euro continues to gain against the dollar. While the Fed’s most recent interest rate move was an increase in rates and the European Central Bank’s was a decrease further into negative interest rates, the Euro has strengthened against the dollar. Perhaps it’s the certainty of the ECB’s monetary policy. The last two moves by the ECB were highly accommodative but widely anticipated. The ECB has delivered the extra stimulus and lower interest rates just as they have promised. The Fed, on the other hand, has been promising rate hikes and has not delivered. This dynamic so far has led to a lower dollar vs the Euro.
Canada and Russia
The Canadian Dollar and Russian Rouble have been trading with the fortunes of the price of oil, which despite the Doha meeting set back have all been increasing since the beginning of the year.
The Brazilian Real has struggled all year but rallied over 3% this week on news that populist President Dilma Rousseff’s impeachment may be nearing.
Gold and Silver
After turning in the best performance of any commodity in the first quarter of 2016, gold has held relatively steady in April. It’s been silver’s turn to shine in April as it has tacked on 10% to its price since the beginning of the month and is now up over 22% on the year making it the best performing commodity so far in 2016.
What’s Up Next Week
Next week’s Fed meeting should hold no surprises, but the 1st quarter GDP initial reading will be watched closely for signs of negative growth that may signal a recession has started. A tepid or negative personal spending print may confirm a weakness in the economy that might cause the Fed to hold off on interest rates in June too. A strong personal spending number will have the market observers and Fed officials talking about imminent rate hikes once again.
Here are some reports that could impact currency movements next week:
Apr 25 New Home Sales Mar
Apr 26 Durable Orders Mar
Apr 26 Durable Goods -ex transportation Mar
Apr 26 Case-Shiller 20-city Index Feb
Apr 26 Consumer Confidence Apr
Apr 27 MBA Mortgage Index 04/23
Apr 27 Pending Home Sales Mar
Apr 27 Crude Inventories 04/23
Apr 27 FOMC Rate Decision Apr
Apr 28 GDP-Adv. Q1
Apr 28 Chain Deflator-Adv. Q1
Apr 28 Initial Claims 04/23
Apr 28 Continuing Claims 04/16
Apr 28 Natural Gas Inventories 04/23
Apr 29 Employment Cost Index Q1
Apr 29 PCE Prices Mar
Apr 29 Personal Income Mar
Apr 29 Personal Spending Mar
Apr 29 Chicago PMI Apr
Apr 29 Michigan Sentiment Final
Year to Date Dollar Index, Oil and Gold Prices
* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.