OPEC President appears to think oil is a less attractive investment

Posted on 3 July 2008 by Ray Boulger

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Yesterday Dr Chakib Khelil, president of Opec, the oil producers’ cartel, told the BBC that a rise in the European Central Bank (ECB) rate today would cause the dollar to weaken further against the euro, thus making oil a more attractive investment.

If Mr Khelil wants to talk his book he should learn a little more about what makes currency markets tick before making comments like this. As widely expected the ECB increased its repo rate today by 0.25% to 4.25%. However, more importantly Mr Trichet’s statement included the comment that he has “no bias” on further moves, whereas many had been betting on the ECB remaining in hawkish mode.

Not only was virtually all of the impact of a 0.25% increase in the ECB rate already reflected in the markets but also the expectation of a further increase this year. The natural consequence of a dovish statement was a weakening of the Euro against the Dollar, and indeed against the Pound. The Euro fell about 1% against the Dollar today (based on FT closing prices from Reuters) and in addition Eurozone Bond prices surged, with the yield on the German 2 year bond falling by 0.19%.

The knock effect helped push the yield on the UK’s 2 year benchmark gilt down by 0.1% and consequently 2 year sterling swap rates have fallen today to 6.1%, which is 0.4% off their recent peak last month. This should result in more lenders following C&G’s move today and Abbey’s tomorrow in reducing the rate on some of their fixed rate mortgages.

Meanwhile, now Dr Khelil has a better understanding of currency markets perhaps he will tell the BBC that as the dollar now strengthening against the euro, oil is a less attractive investment. Or perhaps not!

 

Category: Interest rates, Miscellaneous, Mortgages

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