Tags: invest | japan | opec | dollar

BOJ Rate Tactic, Oil Oversupply to Keep Pushing Dollar Higher

BOJ Rate Tactic, Oil Oversupply to Keep Pushing Dollar Higher

Friday, 29 January 2016 08:51 AM Current | Bio | Archive

We have had two global “unexpected” events that have set “risk on” back in play and suddenly have created a more risk tolerant market environment.

Firstly, we had a totally unexpected move by the Bank of Japan (BOJ) that introduced a negative deposit facility interest rate of -0.10 percent, which means that banks parking their money with the Japanese Central Bank will be charged for doing so.

Secondly, Russia’s energy Minister Alexander Novak said on Thursday Russia would meet OPEC members next month to discuss oil production cuts.

While the move by the Bank of Japan is a fact, which could have far reaching implications for the world’s most important Central Banks’ monetary policies, the announcement by the Russian energy Minister about so-called coming “discussions” on oil production cuts that still have to be confirmed by facts, for now only confirm Russian hopes, which are of course shared by many others.

Today, the Bank of Japan decided to introduce Quantitative and Qualitative Monetary Easing (QQE) with a negative interest rate of -0.1 percent on current accounts that financial institutions hold at the Japanese Central Bank. The BOJ also added it would cut the interest rate further into negative territory if judged as necessary.

Yes, one could say here we go again as we see, at this moment, in the futures markets the Nikkei 225, which is the leading index of Japanese stocks and that is considered as the Japanese equivalent to the Dow Jones Industrial Average Index, up by 2.75 percent, the Japanese yen down by 1.79 percent and the dollar index up by a little more than half of a percentage point!

I’d like to recall investors when last year, on November 4, the price of Crude Brent Oil started to slide. This came only a couple of days after Mr. Draghi, President of the ECB had clearly stated he was prepared to “do more” at the next monetary policy meeting of the ECB.

In simple words, this means further easing by the ECB would probably make the dollar look more attractive, and as of lately the price oil and the dollar did move in opposite directions, this caused oil to move lower. 

Please don’t read me wrong here as, at least so far, there are no signs this is occurring now, but it remains justified to keep a close eye on it.

I wouldn’t go as far as Credit Agricole who already wrote the BOJ’s application of a negative deposit facility rate is like fuel for currency wars as negative rates aim at cheapening the Japanese yen.

Investors could also do well keeping in mind that as of today four (4) of the seven (7) members of the G7 countries, which are the U.S., the UK, Japan, Canada, Germany, France and Italy have an official negative deposit rate with the 3 Europeans at -0.30 percent and Japan with -0.1 percent.

Of course, this situation doesn’t preclude at all rate hikes by the U.S. and the UK, but any rate hike, especially by the U.S., but that probably would come with a strengthening of its currency against the euro and the Japanese yen, which at the same time could easily spread to a whole range of other currencies and that would cause rising volatility everywhere…

We have already seen the Bank of England moving away from raising rates in the relative near future.

Now we’ll have to wait see how the Fed will evaluate this recent development.

Besides all that and as far as what the oil price is concerned I would prefer to remain extremely cautious and certainly would try, as an investor, not to fall in trap of wishful thinking.    

We already learned that Saudi Arabia seemingly has no proposal to reduce output.

We should also not overlook the fact that Saudi Arabia’s standpoint has always been, at least until now, any move on bringing more or less oil on the market should be shared at least by Iran, Iraq and Russia.

Now getting Iran on board for bringing less oil on to the market on a moment that Iran’s oil exports, and as its oil loading schedules show, are set to rise by more than a fifth in January and February in comparison to the same months in 2015, it is practicable unthinkable now the sanctions against Iran have been lifted the country would curtail its oil sales.

Finally, the floating storage of Iranian oil is at present estimated at about 47 million barrels of “condensate,” which is an ultra-light grade of crude, which the faster it gets to its final destiny, the better.

As an investor, I wouldn’t expect a global oil market where everybody plays by economic rules anytime soon, if ever.

The negative interest rate move by the Bank of Japan and continuous oversupply of oil should keep upward pressure on the dollar well in place for some time to come.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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The negative interest rate move by the Bank of Japan and continuous oversupply of oil should keep upward pressure on the dollar well in place for some time to come.
invest, japan, opec, dollar
Friday, 29 January 2016 08:51 AM
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