What Is The Effect Of Higher Oil On Foreign Exchange?
Tame Inflation Data Despite
Rise in Oil
Inflation data this week for the US and Euroland
has been surprisingly benign despite the rise in crude prices. This has put a
bid in bonds. There lies the rub. Bond rallies in the face of rising crude are
simply not common. Higher oil prices tend to drive up nominal GDP
growth, as a result, policymakers will typically raise interest rates as a way
to counteract the effects of embedded inflation in wages. While history can
always be re-written, bond investors/traders should not take too much comfort in
the recent rally.Â
So what is the impact and/or consequence to FX
markets? That really depends on which currency you are looking at. Switzerland
hiked rates for the first time in this cycle back on June 16th, and the market
appears not to have priced in further rate hikes going forward. In fact, the
market has priced in only a 4% chance of a cumulative 50 bp hike by year end.Â
Economic evidence out of Switzerland continues to show solid, consistent
growth. Regardless of an apparent slowdown in the US, Switzerland’s most
important trading partner is Europe, which does appear to be on better footing
economically speaking. The prospect of 75 bp’s by year end is certainly
possible. This may be an opportunity for shorts in EUR/CHF and USD/CHF.Â
The NZD continues to grind higher as rate
differentials and risk aversion continue to be the dominant themes. While we
are not long at present (too extended, as mentioned in Monday’s article), we are
seeking to buy pull-backs into support. Our second theme was long USD/JPY based
purely on oil price appreciation. However, at present, this relationship has
broken down, for now we simply will wait and see if it re-establishes itself.
Today’s Levels:
EUR/USD:Â
1.2370, 1.2321
NZD/USD:Â
.6680
USD/JPY:
109.60, 110.00, 109.12
As always, feel free to send me your comments and
questions. There will be no article tomorrow, I will resume on Monday.
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