The US Dollar has taken quite a bashing over the past 12 months, with the USD index dropping from highs of 103 in early 2017 to 90 this week. It’s not been this low since 2014, and with the index resting on key support levels, could the US Government shutdown tip it over the edge?
On Friday night the Senate failed to pass a long-term spending plan since the previously approved budget ran out in September. As the politicians point the finger and fight among themselves, I’m more interested in what might happen in the event Dollar weakness persists, In particular with regards to the oil price and commodities as a whole.
This week, Brent Oil moved upwards, out of an already bullish trend channel. There have been several check-backs to test the support line since and, so far, it has held. However, this point of inflexion for oil is shrouded in uncertainty.
On the one hand, continued inventory drawdowns reported by the EIA (U.S. Energy Information Administration) indicate the glut is disappearing. The last 9-weeks straight have seen significant reported drawdowns, the latest being a reduction of inventories of 6.861MM reported on 18th January.
A severe lack of investment by companies still reeling from the low oil price shock, and a continued threat of supply disruption from economic and political turmoil, add significant momentum to push prices higher.
Although the US Dollar Index has bounced off support around 89.95, the Relative strength index (RSI) indicates there is still room for a further move lower. This would further amplify oil price gains.
On the other hand, the Dollar has been weakening for a year now, and a full reversal in this trend could put downward pressure on oil and other commodities. A look at the latest Commitment of Traders report shows oil longs at all-time highs, and shorts at all-time lows. Is this a contrarian indicator that confidence is about to max-out?
While most of the major market indices across the globe have been hitting record highs in a supercharged bull-run, numerous economic concerns continue to lurk beneath. As debt climbs and potential interest rate-rises circle above, fears of an economic unravel must surely be exasperating. A slowdown in growth would significantly reduce oil demand and ‘turmoil for oil’ would rear its head once more.
We are all expecting something to give at some point, and after years of sticking QE plasters over the cuts, it’s perhaps harder than ever to pinpoint what will happen. In the last major global crisis of 2008, the world’s Reserve Currency strengthened. But will the world take shelter under the wings of the US Dollar next time?