October 2022: DXY & Oil

October, like the other months of 2022, was a month with many developments. From a macro perspective, the two most influential developments were the rise and fall of DXY and the decisions taken regarding the future of oil.

DXY

Dollar strength is a major challenge!

The U.S. dollar has been trading near 20-year highs, boosted by the Federal Reserve's aggressive tightening and the energy crisis. DXY finished October with ups and downs between 109.6 - 113.5.

"For many emerging markets, the strength of the dollar is a major challenge," the IMF highlighted. "The appropriate response in most emerging and developing countries is to calibrate monetary policy to maintain price stability, while letting exchange rates adjust, conserving valuable foreign exchange reserves for when financial conditions really worsen."

However, low-income countries are already in or near debt distress, and global tightening in financing conditions could exacerbate things.

The updated report was released as finance and central bank chiefs are in Washington for the IMF's annual meetings.

In a separate Global Financial Stability report, also published Tuesday, the IMF noted that risks to financial stability have "materially worsened," adding that markets are at risk of a "disorderly repricing."

"The global environment is fragile with storm clouds on the horizon … The global financial stability outlook has deteriorated since the April 2022 Global Financial Stability Report (GFSR)," said IMF's head of monetary and capital markets Tobias Adrian. "There is a heightened risk of rapid, disorderly repricing which could interact with — and be amplified by — pre-existing vulnerabilities and poor market liquidity."

Dollar's gains spell earnings pain for international U.S. companies. A rally in the U.S. dollar is expected to hit corporate financial results, potentially presenting another obstacle to stocks in a year that has experienced a painful market decline.

Where the money is going: Government borrowing costs, high energy prices and slowing growth are sending investors into cash and out of bonds.?

Climbing dollar makes strong case for interest rate hikes. Stubbornly high inflationary pressures will keep the Fed on track to deliver additional interest rate increases, supporting the dollar

With inflation risks skewed to the upside, the Fed is likely to continue to front-load interest rate increases in the coming months, even if the aggressive tightening cycle triggers a painful recession.

Oil

Oil Prices Wobble on Signs of Weakening Demand in China. The oil cartel decided to decrease production by two million barrels per day.?

Oil prices found their footing after slipping earlier on Chinese economic data that suggests a drop in demand is coming from the world’s second largest economy. The wobble comes after decision by OPEC+ to cut production pushed prices to a five-week high.

OPEC’s cut in oil production provoked the ire of President Biden. United States Treasury Secretary Janet Yellen said that the OPEC+ oil output cut was "unhelpful and unwise."?"It’s uncertain what impact it will end up having, but certainly, it’s something that, to me, did not seem appropriate, under the circumstances we face," Yellen told the Financial Times. She declined to comment on a possible response by the Biden administration but stated that an oil price cap is "particularly helpful to developing countries that are suffering from high energy prices."

Saudi Arabia and the United States continued to clash over a decision by the Organization of Petroleum Exporting Countries and allies, known as OPEC+, to cut its oil production target. Saudi Arabia, OPEC's de facto leader, rejected criticisms by Washington as "not based on facts" and that the U.S. request to delay the cut by a month would have had negative economic consequences.

The White House said it presented the Saudis with an analysis that showed the reductions could hurt the global economy and alleged the Saudis pressured other OPEC members on a vote. Officials with both countries are expected to continue discussions soon.

The United States had criticized OPEC+ after it approved its largest reduction in oil production in nearly 2 years in a move that is expected to further tighten prices. The US claimed the decision will only benefit the 23 allied countries, including Russia, a nation in the middle of a military conflict.

Peskov - "OPEC+ decisions balance 'lawless' US actions"

The Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led allies (OPEC+) make responsible decisions in order to balance the actions made by the United States, Kremlin spokesman Dmitry Peskov told Russia-1 television channel. He described the organization's decision to reduce oil production as a "victory of common sense" that limits Washington from "rocking the global energy markets."

The controversial move inflamed the International Energy Agency (IEA), which warned it could be the final straw that sends the global economy into recession. “With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession,” the IEA said, bluntly highlighting the potential consequences.

If the global economy is to fend off a recession it needs everyone on the same page. But as the IEA put it, in reference to OPEC’s off-piste cut, “disruptive market forces are multiplying.”

Two months ago, our view on oil was as follows;

"In the short and medium term, we expect prices to move along the $90-$105 per barrel line."

We maintain this opinion.

Disclaimer:?All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only.

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