Greenback Remains Soft – Tuesday, May 23

The US dollar cannot get out of its own way, it seems. With a light economic schedule, there is little to offset the continued drumbeat of troubling political developments. The latest turn, as reported first in the Washington Post, that President Trump asked heads of intelligence groups to also publicly deny collusion with Russia.  

We are again struck by the pattern in American politics where the cover-up is often worse than the actual malfeasance. We are also concerned that the opposition is leaning ahead of its skis to the extent that it insist on impeachment talk before the investigations by the Senate and House have fully gotten underway.  

At the same time, in terms of sequencing, news about tax cuts, deregulation, and infrastructure spending is taking a backseat to Trump’s budget for FY18, formally submitted yesterday. It calls for $3.6 trillion in spending cuts over the next decade. There are few additional details from the earlier draft. One of the features that took some by surprise was the proposal to sell half of the US strategic oil reserves.  

The proposal, which needs to be approved by Congress in order to be implemented, calls for selling the reserves starting October 2018 to raise around $16.5 bln. The strategic reserves currently hold almost 690 mln barrels. A sale of half over a ten-year period entails the sale of about 95k barrels a day. This is equivalent to about 1% of the US current output. It is also a little more than the amount that Iraq is producing in excess of its OPEC quota.  

On the eve of the OPEC meeting that looks set to extend the six-month output cuts for nine more months, oil is threatening to break the recent advance. The July light sweet oil futures contract has advanced in four sessions coming into today and is up 10 of the past 14 sessions. It is currently trading off nearly 1%, as is Brent.