Oil Consolidates Gains Amidst Strong US Dollar and Global Central Bank Divergence

Oil consolidates gains

Brent consolidates gains above $90pb, and US crude is at $87pb with little conviction from the bears to counter the positive trend after the latest API data showed around 5.5-mio-barrel fall in US inventories last week.  

The US dollar's appreciation adds an additional layer of complexity for the rest of the world, as not only crude prices rise, but the US dollar used to trade oil gains in value as well. Big Asian economies are reacting to the US dollar's renewed strength. China defends its yuan by offering forceful guidance with its daily reference rate, while the Japanese issued a strong warning this week, threatening investors that if the USDJPY continued to rise, they would intervene. But in vain, the USDJPY 147.80 and consolidates above 147.50 this morning. However, the upside potential is clearly limited as the Japanese have been vocal about the fact that they won't let the dollar-yen hit 150.  

Elsewhere, the USDCAD advanced to the highest levels since March as the Bank of Canada (BoC) kept its policy rate unchanged at 5% as expected, Cable slipped below 1.25, while the selloff in the EURUSD slowed into the 1.07 support. What's next? The European Central Bank (ECB) doves may have gotten ahead of themselves on the back of the recent weakness in economic data, but the fact that the softness in inflation is at jeopardy means that an ECB pause this month is not warranted. ECB's Knot said that the markets are underestimating the chance of a rate hike next week. He reminded that a rate hike is 'still a possibility', just not a 'certainty'. Peter Kazimir also said that one more rate hike should happen in Europe. Yes, the 11% slump in German exports make the ECB hawks sound less powerful, but you must keep somewhere in the back of your mind that economic weakness is needed to slow inflation – at least this is what the theory tells – therefore, the ECB hawks will fight for their last 25bp hike this month.