“Nevertheless this present situation could evolve as cross-border trade (oil and non-oil) volumes rapidly grow. With the recent trends in oil prices, never before has the price evolution of a single commodity so directly influenced the foreign exchange markets. The knock-on effects of OPEC’s decision to protect market share and maintain output levels last November has sent shock waves and FX dominos falling. The impact of this oil-specific catalyst has served to draw the sleepy FX markets out of hibernation and into trending motion. The undesirable side-effect has been to see a resurging US dollar with all the pegged GCC currencies in tow, added Davis Hall.
This critical situation and disinflationary effect of ‘lower oil and stronger US Dollar scenario’ has led to a complete reshuffling of the cards. In this context, winners and losers are emerging as many central banks are seen to gradually ease monetary policy since earlier this year.
Davis Hall continued, “In a low oil price and strengthening US Dollar scenario, there is a lot of pressure on OPEC as it goes into its June meeting. The GCC countries are essentially dollarized economies, and OPEC has to carefully examine its output strategy decision as it could be crucial for this region. There is also the upcoming detente in Iran and this is yet another potential headwind for oil given its effect on the already precarious supply-demand calculus.”
Another theme which could be important for the GCC’s US Dollar pegged currencies is the upcoming Fed policy normalization and the ongoing strengthening view on the dollar. For the first time since 1989, the US Dollar (and pegged currencies like that of the GCC) have outperformed every single alternative within the G20. There have already been visible consequences to this US Dollar strengthening phase which will influence the FOMC (Federal Open Market Committee) meeting’s timing and scope of its inevitable interest rate ‘normalisation’ phase.
“Therefore, the ‘later and less’ camp has a growing following ever since the NY Fed stated that the recent US Dollar strengthening could well shave a full 0.6% off 2015 GDP. In our view, the risk-reward balance is less and less tipped in the US Dollar’s favour beyond the over obsession for a Grexit eventuality. Over time, several AAA alternative currencies are soon to claw back lost ground and surprise us by year-end unlike the unilateral dollar dominance of 2014,” concluded Davis Hall.
