Usd & Cny

Easing Divergence & Recession
Japan 20 Year Bond

CBOE Volatility Index

What does high volatility in 2015 mean for 2016

How to exit from long term quantitative easing


Usd Index, Eurozone & Oil

There`s more than supply and demand: the oil price shocks of the 1970s arose exogenously with respect to global macroeconomic conditions, but their effects were amplified by the endogenous reaction of monetary policy makers within a given a monetary policy regime.
Historically the correlation between the USD Index and Oil has been quite strong (see chart), the fall in crude oil prices has coincided with the strength of the us dollar. A rising dollar will continue to put downward pressure on oil prices.

For the longest time this relationship has been explained by the huge flow of oil imports. A new report by goldman sachs says that rationale has broken with the beginning of the american shale revolution. "In 2008 the us was importing on net basis nearly 12 million barrels per day (b/d) of oil and products...Owing of shale technology, today that number is now less than 5 million b/d without subtracting canada and mexico. Shortly, net imports are over 60% lower than in 2008."

Furthermore, it appears that the dollar relationship with oil is closer when the dollar is rising compared to when the dollar is falling. Oil is also impacted by factors as diverse as supply/demand and geopolitical tensions although more studies are needed to confirm this.
The fed raises interest rates for the first time in nearly a decade by a quarter percentage point and pledged a gradual pace of increases which provided the latest signal of divergence between the fed and other centralbanks. please see the probability of a range of interest rate outcomes based on fed fund future prices

Will a rate hike appreciate the dollar even more ? The last rate hike cycles shows weak or no correlation with the usd index performance. please see the chart. It is tough to predict the upcoming usd index direction, but the fed rate hike is likely to prevent a new trend. While the trend could go either way, analogs show a tendency for the usd to follow the direction in place prior to the hike. This suggest higher prices in the future, with a break above the usd index 100 level which means a further bearish momentum for oil prices.

A strong dollar typically prompts speculative traders to sell oil futures as well as other commodities and buy more of the us currency. But more critically for the oil pricing is that fed/ecb policy divergence will remain a major theme for the upcoming year 2016. There is potential for a further devaluation in the euro and that's the best what can happen to the weak eurozone. please see the chart.

Furthermore, the effects of cheap oil vary from country to country and these differences can have implications for monetary policies too. Cheap oil tends to weaken the currencies of oil exporters such as russia and saudi arabia and puts upward pressure on the dollar and euro. An rising currency constitutes a tightening of monetary conditions, applying new monetary stimuli better the export conditions of a country. Cheap oil increases not only real output but also reduce inflation. A further downward of oil pricing push to eu inflation which could tip the eu balance in 2016 and put the euro area on a deflationary path. Any further oil selling as a result of a stronger dollar could prompt another leg downward, or at least keep oil prices lower for longer before the market turns around and hedge funds and other market participants add more long positions.