Higher oil means lower dollar

Outlook: On the data front, today is the second-tier NAR pending home sales data. Well, maybe not so second-tier, since today we also get a speech by Bernanke on mortgage lending at the FDIC. If we were Bernanke, we’d talk about a return to old-fashioned values like avoiding fraud, a good table-thumping, but that’s improbable.

Hard data is always good because the absence of hard data lets loose the demons of rumor and speculative chatter. Yesterday, for example, the US dollar got a boost from talk of the US releasing oil from the Strategic Reserve—entirely unfounded, as far as we can tell. That particular story was US dollar-friendly but the Lehman estimate of Fannie and Freddie needing $75 billion was not so innocent. What’s the difference between a rumor and an analyst’s estimate? We tend to think it’s the story-teller having real facts, but in the end it’s the willingness of the story-teller to be named.

We think the fundamentals do not support a stronger dollar. If fresh disclosures are coming in the banking sector, the US is a lot less likely to keep it concealed than (say) Europe. The Fed is more likely than the ECB and perhaps the BoE to come right out and say that rates cannot be hiked to fight inflation because of financial market problems. Therefore, the dollar is more likely to be sold off if and when such a perception becomes widespread. The balance is tipped the other way on the recession story. The market is more impressed by signs of slowdown/recession in Europe than in the US, mostly because the data has been mostly upbeat from Europe (if you exclude Spain) and slowdown has not been priced in. But dueling recession stories are a thin basis on which to build a strong dollar scenario.

And then there is oil. The idea that Iran is going to be reasonable is simply silly. Today it promised to bomb Tel Aviv and US ships if anybody attacked it, whether the US or Israel. That doesn’t sound like reasonableness, it sounds like saber-rattling. Oh, well, somebody somewhere is always saber-rattling. The probability of a full halt of shipments through the Straits is actually pretty low—it’s the extreme scenario. But supply problems in any of the hellholes where oil is produced is highly likely. Since demand is high, rising and inelastic, and supply is iffy (and the market is hardly about to get regulated into lower prices), there is only one logical deduction here—oil is going higher. Higher oil means lower dollar, to be crude about it. So while we may enjoy a minor boost near-term, a long dollar position is foolish over any time frame longer than a few hours.

Bye for Now

Barbara Rockefeller