Oil and Dollar’s fate is strangely intertwined strangely these days.

While oil gets pressured by stronger Dollar, weaker former takes toll over inflation expectations, thus preventing FED from hiking, so weakening the Dollar. So as oil price goes down once more, we expect US short term rates will get eased thus creating pressure onto Dollar to weaken.

Percentage change in US Dollar 2 year treasury yield is strongly coinciding with changes in oil price. As oil bottomed on 11th February, drop is changes in yield coincided about same time. By this week yields were changing as fast as 0.3% compared to close to negative move (yearly) in early February.

However, there’s a catch. If oil price declines slowly, due to base effect it may not exert as much influence like it did last year. So if oil stabilizes from here rates are likely to move much faster. Oil will not be preventing relative rises in price viz. a viz. inflation.

It will be extremely crucial to watch bond and inflation expectations hereon…..whether they succeed in breaking its strong link to oil, provided oil stabilizes at current level.

WTI is currently trading at $36.4/ barrel, down from its recent peak around $39/barrel. Dollr index is at 96.5 down -0.1% for the day.