The US dollar has benefited from the recent slump in oil prices, but a report from Bloomberg suggests that in the long term, the greenback may suffer as a result. The price slump may add to other factors, such as a challenging economic outlook and ongoing political turbulence, and accelerate the trend of investors reallocating investments into money-market instruments, which has proven in the past to be a sign of dollar weakness. For now, the US are taking a break for thanksgiving but there are some signs that the strength of the dollar may be wavering and that tougher times are ahead in the run up to Christmas and into next year.
Despite considerable pressure from the EU, Italy appear unmoved on the topic of their budget and unwilling to make any major concessions. The sticking point is the plan to boost the Italian economy by increasing borrowing, decreasing the pension age and introducing a universal basic income. In response to Brussel’s declaring Italy’s budget in breach of their rules, and kickstarting a disciplinary process that could theoretically lead a fine equivalent to 0.7% of Italy’s GDP, Italy’s Deputy Prime Minister, Matteo Salvini, announced that they would respond to the European Commission (EC), dismissively continuing: “Has the letter arrived? I was also waiting for a letter from Santa Claus. We will discuss it politely as we always have. We will exchange opinions.” With Italy staring down the barrel of £2tn in public debt, but looking unlikely to blink first, and the EU keen to assert their authority and maintain union within the bloc, expect this story to be ongoing and meanwhile the euro may be paying the price for a lack of closure on the matter.
The drop in oil prices have caused the Canadian dollar some difficulties, at some points putting Canadian oil prices below their budget level, making crude production unprofitable. A brief bounce may suggest better times are ahead, but there are other issues weighing on the Loonie. The Bank of Canada(BoC) unveiled the 2021 review of the monetary policy framework, with a focus on unconventional policy and heightened concerns about the zero lower bound. This is a situation that may occur due to the short-term nominal interest rates near to zero. This creates a liquidity trap and limits the capacity that the BoC has to stimulate economic growth.
With Theresa May racing to finish the Brexit deal, due to be signed on Sunday, the pound was already in for a rocky few days. German Chancellor Angela Merkel’s demand for a deal within 24 hours as a condition of her signing added to the mounting pressure and dissatisfaction from elsewhere, including the dispute over Gibraltar with Spain. On the domestic front, the borrowing figures showed that the deficit rose to £8.8bn from £7.2bn last year, the biggest October figure for three years, and significantly higher than the £6.1bn that was forecast. There is a caveat however, with a Treasury spokesperson declaring it the government's best year-to-date performance since 2005. The markets weren’t convinced, and the pound has been trending lower since the release of the data.
The Japanese yen is making gains as the euro struggles to keep up and the US dollar faces mounting pressure. The biggest challenge comes from USD, which continues to be weighed down by the latest disappointment from the US durable goods orders data and speculations that the Fed might pause the rate hike cycle as early as spring 2019. While the US is on a thanksgiving break, the yen may be the beneficiary.