Hoor Asrar looks at a visible contrast
Oil Dips As Dollar Steadies markets are undergoing a fluctuating period though this time round the prices are going down making consumers take a sigh of relief. The oil dipped as the American Federal Reserve Board announced the third straight hike bringing the rates to the highest they have been since 2008. After the rate increase WTI crude was trading at $83.31 per barrel—down $0.63 (-0.75%) on the day and Brent was trading at $90.03 per barrel or a loss of $0.59 on the day. The American rates were increased amidst a new set of sobering projections with the prediction that the rates may rise at a faster pace as the economy is projected to just crawl. Keeping in view the economic slowdown, the rates are projected to rise to the 4.25%-4.50% range by the end of this year and at the end of 2023 at 4.50%-4.75%.
It is now clearly seen that oil has lost its upward trend though it soared this year, with the Brent benchmark coming close to its record high of $147 in March after Russia’s invasion of Ukraine exacerbated supply concerns. Worries about weaker economic growth and demand have since pushed prices lower. The market has also been pressured by forecasts of weaker demand, such as last week’s prediction by the International Energy Agency that there would be zero demand growth in the fourth quarter. Despite those demand fears, supply concerns kept the decline in check. The market still has the start of European sanctions on Russian oil hanging over it.
As supply is disrupted in early December, the market is unlikely to see any quick response from US producers. Easing Covid-19 restrictions in China, which had dampened the outlook for demand in the world’s second-biggest energy consumer, could also provide some optimism. Oil fundamentals are still mostly bearish as China’s demand outlook remains a big question mark. On the supply side, the market has found some support on dwindling expectations of a return of Iranian crude, as Western officials played down prospects of reviving a nuclear accord with Tehran. It is predicted that oil markets will tighten by the end of the year and Brent will return to $100 a barrel in the fourth quarter. Oil prices may also be supported in the fourth quarter as Opec+ members are likely to discuss production cuts at its October meeting, and as Europe would face an energy crisis amid uncertainty on oil and gas supply from Russia.
Oil Dips As Dollar Steadies
On the other hand, the dollar hit a fresh two-decade high against a basket of currencies, gaining more than 1%. The US currency’s strength – it has appreciated by more than 16% on a year-to-date basis – has stoked concern at central banks around the world about the potential exchange rate and other financial shocks. The US dollar stayed near a two-decade high ahead due to the decisions of the US Federal Reserve and other central banks. A stronger dollar makes dollar-denominated commodities more expensive for holders of other currencies and tends to weigh on oil and other risk assets.
The dollar hovered near its recent peaks as expectations that the United States Federal Reserve would need to hike more to tame inflation sent Treasury yields higher and kept the greenback in demand. The towering dollar pushed the offshore Yuan past the critical threshold of seven per dollar for the first time in more than two years overnight, with the Yuan hitting a trough of 7.035 in Asia trade. The onshore unit similarly broke the key level soon after markets opened on Friday, and last traded at 7.009 per dollar. It was reported that China’s economy was surprisingly resilient in August, with factory output and retail sales both growing more than expected last month. But a deepening property slump weighed on the outlook. Growth, and policy divergence between the US and China could continue to support the USDCNH in the next few months, even if some pullback is seen intermittently.
Often used as a liquid proxy for the Yuan, the Aussie hit a two-month low of $0.668, before regaining 0.28 percent to $0.672. The kiwi likewise fell to $0.596, its lowest level since May 2020, and was last up 0.23% to $0.598. The euro was up 0.05% to $0.999, while the sterling fell 0.03% to $1.147. This could spell pain for the battered Japanese yen, which has been a victim of the surging greenback and growing interest rate differentials. The dollar was 0.09% lower against the yen at 143.36 but remained on track for a fifth straight weekly gain. The dollar strength will persist, at least in the near term. The two key factors that are supporting the US dollar are still in place, so it is getting a very hawkish market pricing. As long as the prospect for the global economy is still weak, the US dollar can remain strong and perhaps edge a little bit higher. The Weekender