On the Consequences of the Oil Price War

November 28th, 2014 5:44 am | by John Jansen |

Via Kit Juckes at SocGen:


Good morning. FX weekly link is above. Meanwhile, Black Friday sees consumers all over the world spend the money they have saved (or will save) thanks to cheaper oil prices, on gifts for others (or themselves?). Walking through the dealing room this morning I got the impression that cheaper oil means more handbags,  but maybe the sample isn’t big enough.                                                                                                          Cheaper oil is obviously bad for big oil exporters and is a positive for GDP in countries which are big net oil importers, as well as for consumers everywhere. The big ‘winners’ on that basis include China, Japan, India, Germany and France.                                                                                                                                                    There is also a better correlation between 5y/5y inflation prices in the US (and Europe) and oil prices, than you’d think was justified. I don’t think long-term inflation exepctations are really driven by spot oil prices, but bond bears, inflation hawks, those who though QE would send up CPI instead of sending asset prices into hyper-drive, are all being bludgeoned by data and markets. The result is that the feed-through of lower oil prices to bond yields is swift and significant and outweighs, so far, the positive growth effects in some countries. So down go rates and rate expectations and in the process, the Euro is softer and the yen and much of the Asian FX space is weaker too. Now, Japan is a winner from cheap oil, but if the Nikkei goes up, the yen must weaken and the news that inflation is falling back didn’t help either. Likewise, at the margin, cheap oil helps Europe more than the US in terms of offsetting economic headwinds and EUR/USD ‘should’ be correcting through 1.26. But the prospect of even more disinflation trumps that.                                                                                                        At least its easier if you just focus on big commodity-senstive currencies, No good news for CAD, NOK, or RUB here. Nothing friendly in the commodity space for AUD either (Olivier has written a nice note on reasons to be bearish AUD in the weekly btw).                                                                                                                                                Away from OPEC and oil, the overnight data started with a jump in the Frevch jobseekers total yesterday evening, a reminder if anyone needs it that Europe’s problems (downward pressure on real wages, and upward pressure on unemployment in places where wages haven’t been able to adjust) can’t and won’t be solved by low rates or QE. The EU postponing action against countries which have broken fiscal austerity rules meanwhile, thereby ensuring more ‘austerity-lite’ that neither solves structural problems or helps growth, is a depressingly awful policy. Europe gets unemployment data (unch’d at 11.5% is expected, which some fool will say is a sign things aren’t getting worse), CPI (exp 0.3 headline, 0.7 core). Bund yields heading for 50bp….  There’s also Swedish GDP, which could be pretty weak, but nothing in the US.

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