Oil-Exporting and Oil-Importing Countries

  

In 2014, global oil prices have fallen by nearly %50. In summary, world oil supply is expected to growing while world oil demand is falling this year. Falling oil prices is good news for oil importers, but it is bad news for oil exporters. Oil importers benefit from a falling oil price and this has led to decrease the current account deficit for oil importers. This is still useful, especially for Turkey and India which have large current account deficits and economies’ depend on foreign capital to fund its big  deficit and imports.  (Even though current account deficit has shrunk, foreign capital flow is weak to finance for these countries). However, for oil exporters, a falling oil price has caused lower trade surplus and government budget deficit. For example, Venezuela has heavily devaluated its exchange rate and forced to face high inflation and budget deficit compare to other oil exporting countries. Moreover, Russia lost about 2bn dollar in revenues for every dollar in the oil price and the ruble felt sharply.  As a result, Russia has confirmed not to cut production because she did not want the importer countries to increase their production. On the other hand, for example, Saudi Arabia fixed the value in its currency immediately through  foreign currency reserves. China’s situation is another story compare to other exporting countries.

China became the dominant source of growth in crude-oil demand in recent years and  cheaper oil increases China’s private demand and the purchasing power of its consumers , but weakness in demand in emerging countries and Europe is bad for their trading partner China.

US/EURO AREA INFLATION RISK CONTINUE !?

The Harmonized Index of Consumer Prices (HICP) is an indicator of inflation and price stability for the European Central Bank. (ECB).

 Wikipedia;

The HICP differs from the US CPI in two primary aspects. First, the HICP attempts to incorporate rural consumers into the sample while the US maintains a survey strictly based on the urban population. In actuality, the HICP does not fully incorporate rural consumers since it only uses rural samples for creating weights; prices are often only collected in urban areas. The HICP also differs from the US CPI by excluding owner-occupied housing from its scope. The US CPI calculates “rental-equivalent” costs for owner-occupied housing while the HICP considers such expenditure as investment and excludes it.

ECB clarified that the target of inflation should be as below 2 %.There is an Inflation Risk Premia in the Euro Area and the United States. Since june 2014, oil prices have decreased by almost 50% in Euro terms.The crude oil slump has led to inflation negative side. Nowadays, strenghten dollar helps the US economy back on a stronger growth, on the other hand, rate of change in prices continues its upward trend and  strengthening dollar worries U.S exporters, that makes their products more expensive in foreign markets. Thus, there is still inflation risk for US.

Emerging Currencies

IDR=Indonesian Rupah 

ZAR=South African Rand 

TRY= Turkish Lira 

INR= Indian Rupee 

BRL=Brazilian Real Rate

The US dollar index has reached its highest level in more than a decade. As a result , the emerging markets are under pressure against the dollar strenght such as Brazil, South Africa, India, Indonesia and Turkey . Especially, troubled Turkish lira continues to drop compare to other emerging currencies in these days. 

Currency Wars Again !?

ECB (European Central Bank) starts buying sovereign bonds in an effort to avoid deflation and stimulate economic growth under QE (Quantitative Easing) plan.

The ECB and national central banks started buying sovereign debt on Monday (9th of March in 2015) under the 19 month plan to inject 1.1 trillion euros (1.2 trillion dollar) into the economy. As a result of buying bonds, the yields on eurozone sovereign debt hit record low, this has led investors to run away from eurozone in these days because this area is unattractive and there is uncertainty for them.

Eventhough Draghi believes that ECB action can and will return inflation to goal,  there  are still imbalances about this program’s future. Within Europe’s path to QE, euro started to go down against the dollar. Dollar index touches 11 year high in Asia and is seeing the second fastest 6 month rise in 40 years. In this case, dollar pressures emerging markets, lira ends eight day of losses. Stocks and oil sell off as US dollar hits its highest since 2003.

On the other hand, strenghthening dollar worries U.S exporters because they are afraid of US dollar making their products more expensive in foreign markets.

What will happen euro/dollar parity in the long-run? These negative yields in eurozone will continue in the long-run? QE plan will save the eurozone or not? We will see….