The dollar is trading back down across the board today as its fate remains tightly correlated to oil prices at this stage. After jumping to a high of $119.50 yesterday, WTI crude oil has seen quite the reversal in falling back to $87.10 today. That as the roller coaster ride continues with market players now suddenly feeling more optimistic about the US-Iran conflict. From earlier: The wild ride continues in the oil market
It remains to be seen how long this optimism can last without any actual positive developments on the energy disruption in the Middle East. For now, we can only wait and see as markets are hoping for a quick resolution. But if that doesn’t come, we might have to start talking about repricing everything once again.
In any case, traders are already looking to try and run with the idea of a better market mood today. Oil prices are simmering below $90 while stocks are looking to continue with the rebound yesterday. S&P 500 futures are now up 0.3% after a more tepid showing earlier. Meanwhile, the dollar is down across the board while the aussie is leading the charge in the major currencies space.
The currency pair is up 0.4% to 0.7103 currently, after dip buyers managed to hold daily closes above the 0.7000 mark since last week. The drop early yesterday threatened a break of the figure level but the momentum swing amid the shift in sentiment helped to switch things around in the end.
And now, suddenly we’re starting to talk about a test of the August 2022 and January 2023 highs around the 0.7135-50 region again. That’s the key line in the sand on the charts, before the next leg higher is reached.
While broader markets are focused on the US-Iran conflict, just be mindful that the central bank bonanza will return next week.
In that lieu, the RBA was the first major central bank to pivot back to rate hikes amid sustained inflation fears. And with higher oil prices threatening higher inflation pressures globally, that might compel the central bank to act even quicker in their pivot.
They already laid out a more hawkish tone in February but would going with back-to-back rate hikes be too much tightening for the economy? That’s the big question now. As things stand, traders are pricing in ~35% odds of a rate hike next week. And for the rest of the year, there’s ~61 bps of rate hikes priced in currently.
As the risk mood picks up again and markets slowly turn their attention away from the Middle East eventually, the aussie looks primed to capitalise amid a very strong argument for the RBA to keep policy divergence in the currency’s favour.
This article was written by Justin Low at investinglive.com.
