Oil: Lower prices ease inflation risks – OCBC

OCBC’s Sim Moh Siong and Christopher Wong note that easing Oil prices, helped by reduced Iran–US tensions, are bringing crude closer to their base case of a gradual downtrend. They argue lower Oil should relieve inflation pressure, partially reverse recent bear-flattening in global bonds, and leave equities and FX relatively unaffected. The macro backdrop still favours overall USD strength and carry trades.

Crude drift lower supports USD carry

"Oil prices eased after recovering much of their June losses last week, as Iran signalled a pause in retaliatory strikes while the US appeared to halt further attacks."

"Lower oil prices should ease inflation concerns for central banks and support a partial reversal of the bear flattening seen across global yield curves last week."

"The renewed decline in oil prices brings developments closer to our base case that crude will gradually trend lower over time."

"That said, oil could rebound at some point as the underlying issues of freedom of navigation through the Strait of Hormuz and Iran’s nuclear programme remain unresolved."

"Carry trades that pair high-yielding, energy-exporting currencies such as the USD and AUD against low-yielding, energy-importing currencies such as the EUR, CHF, JPY and THB should continue to perform well."