US Dollar At Record Low, Oil At Record High - Will These Extremes Moderate Next Week?

The US dollar will find little support given the sharp rally in oil, and economic data isn’t helping the case either. The University of Michigan Consumer Confidence survey exacerbated fears of a consumer-led recession in the US, as the October reading was unexpectedly revised down to 80.9 – the lowest since June 2006. Stock market tumbles undoubtedly played a hand in the deterioration in sentiment, and further market routs will only leave consumers more pessimistic. Will the dollar’s woes ever end? Within the next few days: probably not. Indeed, the currency faces major event risk this coming week from the FOMC rate decision, the release of Q3 GDP, and non-farm payrolls. The central bank decision and GDP reading hit the wires on the same day, and the former will garner much of the attention. Fed fund futures now price in a 92 percent chance of a 25bp cut on October 31st to 4.50 percent, but there is speculation that Bernanke & Co. could surprise the markets. Will they slash the benchmark rate by 50bp like they did in September as economic conditions worsen, or will they show the DJIA and the S&P tough love by leaving policy unchanged? And what about oil? Given current geopolitical tensions and undeniably strong demand for the commodity, there is much talk about oil jumping to the psychologically important $100/bbl level. Volatility is soaring, and while the greenback is likely to remain weak and oil strong in coming days, all of this wild price action creates the potential for steep corrections market wide.