.
Shavasb Bohdjalian
For the past two months, Fed officials have been insisting that there is no threat of inflation and that the spike in oil, metals and agricultural prices would not hold and would not feed inflation into the wider economy.
Three weeks ago, Fed Chairman Ben Bernanke in his first press conference after a Fed meeting insisted that the spike in oil and metals was temporary which is why the Fed would stick with its current loose monetary policy with the promise of new increase in interest rates. The Fed’s easy-money policy has been widely blamed for the global run-up in commodity prices — especially oil. Now that oil prices appear to have peaked and are coming back down, it’s time to give the Fed some credit.
After flooding the financial system with cash for more than two years in an effort to stabilize financial markets and the US economy, the Fed announced it would end its QE2 but continue to reinvest the proceeds from its previous investments in bonds. The anticipated end of the QE2 and several margin hikes by commodities and oil exchanges have forced oil and metals prices sharply lower.
The dollar has also gained as risk appetite wanes, but some of the dollar gains may also be attributed to talk about the threat of default by Greece and other eurozone countries.
As newswires reported, the $20 crash in oil prices to under $100 a barrel has not been seen since 2008. Until now, I have not been able to find a logical explanation why oil crashed down. The best explanation is that the same forces that drove prices higher seem to have reversed course. Global growth seems to be slowing. The dollar is strengthening. And the inflation threat from the Fed's easy-money policies may be easing.
But if the Fed is right in its analysis of the trend in oil prices, then the ECB must be so wrong since inflation fears in Europe prompted the ECB to raise interest rates last month. Policymakers there have made clear they expect more rate hikes are coming.
The slide in oil prices could also be temporary. Tensions remain high in many Middle East countries that export oil. Saudi Arabia, as the only major producer with spare production capacity, has promised to keep the global market well-supplied; any restriction of output could tighten global oil stocks. Global economic growth could pick up speed, intensifying demand. And Congress and the White House could stumble in reaching an agreement to raise the debt ceiling, sending the dollar plunging.
The price action on the dollar deserves close watch amid expectations that the eurozone finance ministers meeting will approve the aid package for Portugal and the new package for Greece will be approved once the Greek government agrees to pledge additional assets as collateral for the new loans. This does not mean that Greece will have solved its problems, but it will postpone restructuring talk for at least six months, allowing the euro to strengthen again.
One thing is fairly certain, though. Until the outlook for oil prices becomes clearer, expect more daily price swings that will cause heart-attack for even the most experienced traders.
www.eurivex.com,
[email protected]
(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. Eurivex is also a provider of forex white label solutions and forex brokerage packages. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
