The US dollar is trading within yesterday's ranges against the major currencies. The Canadian dollar is the main exception. It is pushing lower still, with the greenback pushing a little beyond CAD1.1550. The main development today is the continued drop in oil prices.
The latest cause has been the cuts in demand forecast by OPEC and IEA. Generally softer than expected Chinese data, especially industrial output, which slowed to 7.2% in November from 7.7% in October, and reports indicating a key policy-making meeting resulted in a cut in the 2015 growth target to 7.0% from 7.5%, reinforced ideas that oil demand will slacken. In addition, reports suggest that China, which had been building strategic (oil) reserves as prices fell, has stopped.
Oil prices have fallen about 10% this week. Brent finished last week near $69.10 and now is quoted around $63.25. WTI finished last week just below $66 and now is just above $59. The slowing of the Chinese economy coupled with increased output in the US (reached a new high of 9.12 mln barrels a day in the week of December 5), and larger OPEC discounts maintained the downward pressure.
Assuming one was an oligopoly, this is precisely the rational-actor strategy: Allow the price to fall to push higher cost alternatives out of the market. We suggested that the channel for this might not simply be a drop in oil prices themselves, as powerful as that may be, but also through cutting the cheap funding, which was largely predicated on the purported value of the oil in the ground.
This precipitous decline in oil prices hits the global economy as deflationary forces still threaten large parts of the world economy. It has knocked down US 10-year yields. After the constructive employment report, US 10-year yields finished last week near 2.30%. Today they touched 2.11%. And this despite, continued robust data (see yesterday's 0.7% rise in headline retail sales) and speculation that next week's FOMC statement will delete or dilute the reference to “considerable period” as the next step towards preparing investors for a rate hike next year.
