The US Dollar

The US currency paused its rally after the President of the Federal Reserve of Dallas Robert Kaplan called for caution in the matter of rate normalization, saying that inflationary dynamics remain unconvincing.

One could argue that such a statement can be interpreted in two ways. On the one hand, that the monetary policy of the central bank cannot target a long-term nominal rate (because of changes in inflation expectations). On the other hand, that the official’s worries are caused by a sense of adventurism in Trump’s tax reform adventurism, as short-term rates on the TIPS market are going up (the direct impact of tax reform), whilst rates on ten-year bonds are declining. The markets might expect in the future that the economy will have to pay with a recession. History confirms that the divergence of short- and long-term inflation expectations is an unhealthy sign, and, according to Kaplan, looks a bit “ominous.”

The US sovereign debt related to inflation recorded a $432 million inflow of capital last week, showing the best dynamics since March. For 10-year bonds, there was a corresponding outflow of funds. Capital flows in these instruments are a direct indicator of “progress” in implementing the Trump reform and its economic consequences.

However, one must remember here that structural changes restrain the growth of prices. Of course, this is what technological progress and globalisation commands; reducing the need for labour which presses on the competitiveness of national production. Trump’s protectionist ideas can suppress the influence of the latter, but reducing the tax burden on firms can only stimulate the automation of production.

In accordance with rational expectations (financial markets are very close to this), it is also worth noting that tax cuts should be perceived as a future increase in taxes, which can actually level out the effect of fiscal stimulation. Whether it is possible to increase the propensity to consume by tax breaks in the population (which in turn should trigger inflation), or everything will go into savings, it is rather difficult to predict.

Nevertheless, the optimism on the dollar is likely to be replenished quite quickly, since the currency is much more sensitive to short-term expectations, the background of which is entirely occupied by fiscal stimulation by Trump, the rate of rate hikes and the renewal of the Fed’s leadership.

Kevin Walsh, the potential candidate for Yellen’s position, is known for his criticism of increasing the asset balance in 2011. This means that if he gets the reins, the pace of tightening of the policy may accelerate, which will be a bullish signal for the dollar. News on this topic can cause a clear reaction of the US currency.

The oil Market

In the battle of OPEC vs. the US shale industry, there is an interesting signal regarding financing of the latter by large banks. BNP Paribas, the largest listed bank of France, said on Wednesday that it reduced the financing of oil shale projects and oil sands, as well as projects related to their transportation.


What does this mean? Is it awareness of the fact that the margin for these projects will be long suppressed because of competition and low prices? Pressure from regulators or stakeholders?

Given that the main target of investments turn to projects with renewable energy sources, it seems that the bank does not like the impasse in which the producers on the oil market came.

Earlier, another French bank, Societe Generale, also said that next year it is getting out of the CHP project using coal and that it will increase support for “green projects”.

The WTI barrel reached a mark of $51 on Wednesday, as the market is growing confident that OPEC, recalling its capabilities as a cartel, will no longer return to price wars and will continue to follow the path of reduction.

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