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 to $63.45 on Friday from its recent low of $45.59 on Jan. 13.
That's despite record production by Saudi Arabia, all-time highs in crude oil inventories, gushing U.S. 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 Commodity Research Bureau 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 might be peaking on expectations that the Federal Reserve'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 U.S. economic outlook. I am in the one-and-done camp for now.
The strong correlation might 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 might be mounting expectations of better global economic activity. A few of the commodity currencies--i.e., the Canadian dollar, Brazilian real and Russian ruble (thanks to the oil price rebound)--have been rallying in recent days. However, that's after significant sell-offs over the past year or so. On the other hand, the Australian dollar and the South African rand have simply stopped falling in recent days.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.
