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già finito il crollo dell'eura
Not too long ago, we wrote in Currency Currents that it was interesting that the crude oil - US$ correlation was becoming a bit less correlated. And though correlations have a way of ebbing and flowing, it was odd that crude oil blew off to a high of $150 per barrel and the dollar didn’t make a new all-time low. In fact, the all-time low (measured by the US$ index) came when crude oil was around $104 per barrel (dirt cheap in retrospect—LOL!).
Crude Oil vs. US$ Index Daily: The US$ made an all-time low when crude was hovering around $104 per barrel. Thus, a 44% increase in crude and the dollar actually rallied slightly. So, despite another $46 dollar blow-off move in oil, the US dollar continued to hover above its low (which incidentally was made on the same day Bear Stearns was “saved”). Net-net, either:
1) Oil producers aren’t running from the dollar like they were. Maybe they were urged to believe a bottom is near (and it may be thanks to consecutive visits, and carrot and stick schmoosing, by V.P. Cheney, President Bush, and Treasury Secretary Paulson, as we noted in a Currency Currents recently, who made consecutive trips to the region beginning in March).
2) It is a correlation—and correlations are by their very nature can be nebulous and useless at times, especially over short-term time frames.
3) Falling global demand is leading to a closing of the Crude Carry Trade. Say what? Yes, it is a theme we’ve been working on/thinking about/conjecturing or guessing about…and it goes like this:
a. Country X, a non-oil producer, needs to import crude oil, which is invoiced in US dollars.
b. Country X notices the dollar price of crude rising and the dollar falling, so decides to borrow dollars to buy crude. And over time Country X notices
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that paying back those dollar loans is getting cheaper and cheaper. So, why not continue to make this trade, using less of government of Country X budget to buy crude directly, why not just keep borrowing more dollars?
c. Now this is the tricky part that we have been “thinking about, but can’t confirm with hard numbers,”…
i. Two things are changing that lead to a closing, or reversing, of the crude-carry trade:
1. The credit crunch i.e. access to available credit is making it harder to borrow dollars, and
2. Falling domestic demand for energy, because of slowing growth in Country X, means there is less oil needed to support the economy.
a. Thus, the need/ability to borrow dollars to pay for crude declines. And as this pressure is relieved, the dollar stabilizes and even rises relative to Country X currency, especially if Country X is of the emerging/developing nation variety where central banks are way behind the inflation curve.
This is a classic self-reinforcing process…lack of global credit leads to slowing global growth, leads to slowing oil demand, leads to more closing of the Crude Carry Trade, leads to change in dollar sentiment, leads to new price trend led buys short-term players, and leads to capitulation to the trend on the part of dollar perma-bears…