Oil exporters suffer from their main trade's low price, while the same condition injects a few breaths into slumped oil consumers like Eurozone and Japan. However, the one who benefit the most might be the US.

The impact of world oil price drop reverberates around the Earth. Oil exporters such as OPEC countries and Russia suffers from their main trade's low price, while the same condition injects a few breath into slumped oil consumers like Eurozone and Japan. However, the one who benefit the most might be the US.

 

High Domestic Demand

US Manufacture in November reportedly is still satisfactory. Yesterday (12/1). Institute for Supply Management's PMI Manufacture was 58.7, or three points lower than the record high 59.0 that was recorded in the previous month. Index over 50 means that business is still expansive, thus signify the fact that the US stays far above other regions that currently suffer contraction (German, France, and Italy), and slowdown (China, UK).

ISMUS ISM Manufacturing PMI: November data was 58.7

The figures are good due to the raising domestic demands in the last few months that reportedly has risen to the highest in a decade. This is important because US economy is consumer-driven, where around 70% of its economy is moved by consumer expenditures.

Also supporting the rise of domestic demand is world oil price drop. Oil price one day will meet its lowermost support and goes back up or consolidate in a certain level. But for the time being, the drop highly benefits Uncle Sam.

 

Fed: Oil Price Drop Supports US Economy Recovery

It needs to be noted that US is one of the world largest producer as well as consumer of oil. Its shale oil production has changed world oil market landscape and paralyse OPEC cartel power in the face of falling oil price. Meanwhile, the US is still managed to survive on account of having relatively lower dependence on oil. On the other hand, US consumers gain greater advantage from lower oil price by allocating income to other necessities.

HargaUS Light Crude Oil Dropped To Around 68 USD/Barrel

Last night in two separate occasions, two Fed members agreed that oil price drop is positive for US economy. Although lower oil price will lead to lower inflation, but the same price might strengthen US economy recovery.

As quoted by Bloomberg, Fed vice chairman, Stanley Fischer mentioned, I’m not very worried. The lower inflation that we'll get from the lower price of oil is going to be temporary. Furthermore, he said, lower oil price will be better for everybody. While New York Fed President, William C Dudley, revealed that low oil price will boost real income significantly.

However, Dudley thinks that the Fed still needs to take care in raising rates because of the low inflation and choppy employment.

 

Awaiting Employment Report

The Fed has kept near zero rate since December 2008, and at some points have channelled monetary stimulus along with it. At the end of 2013, the US Federal Reserve started normalization till the amount of Quantitative Easing down to zero. However, Fed officials are likely going to defend the current status quo for a bit longer.

WilliamWilliam C. Dudley, Fed New York President and Vice Chairman of 2014 FOMC

In the same occasion, Dudley further said, It is still premature to begin to raise interest rates. When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late. Even so, he seemed to believe that risks of a drawn out recovery has diminished. He did not see market expectations that the Fed will hike rates around mid-2015 as unreasonable, although it will largely depend on US economy performance and financial market condition.

 

Choppy Job Market

Meanwhile, US Dollar experienced correction in the beginning of this week amid speculation than US Dollar might have strengthened too fast, too early, even as next ADP Employment Change is expected to slow.

Whispers in the market expressed doubts on the US dollar appreciation. While other currencies depreciated and interests are trimmed, the circumstances appears unfavorable for the US Dollar. John Kicklighter from DailyFX pointed out that there are strong correlation between global GDP and US GDP growth. Therefore, the longer and the farther economic slowdown suffered by Japan, China, and Eurozone, the worse it will be for  the US. Or in another word, it will be difficult for Fed rate to be hiked in case of a drawn-out global slowdown.

In line with it, job market is not expected to show significant improvement. Bloomberg survey predicted November ADP Nonfarm Employment Change to add only 222,000 jobs, down from 230,000 in October. But forecast placed November Nonfarm Payrolls (NFP) to go up from 214,000 to 225,000, with average hourly earning moves slightly from 0.1% to 0.2%.

These latest development depict how uncertainty is still haunting US Dollar movements, especially now that we have entered winter where economic data are more likely to slip from its estimates. As volatility is predicted to stay high, swing traders might seek to buy the US Dollar when it is corrected to lower range, while short-term trader should take care not to be trapped by sudden big moves.