Thank Trichet for commodity selloff

Our Long National Retail Gasoline Price Nightmare Is Over!

Maybe someone does have a magic wand when it comes to a top in gasoline prices. Jean Claude Trichet may finally be getting it. The ECB seemed to back off of a promise to raise interest rates and in doing so instantly changed one of the major fundamental drivers that has caused oil and gasoline prices to rise.

Central bank policy both here and abroad has created interest rate and currency imbalances that have caused commodity prices to soar to heights not seen in years and now they crashed down into speculative oblivion. In fact some of the biggest one day moves in oil since the credit crisis began have come on the heels of comments from none other than Jean Claude Trichet himself.

Back In 2008 as the credit crisis was unfolding, a fateful decision by Jean Claude Trichet sent oil absolutely soaring. In the early stages in the credit crisis when Ben Bernanke was begging the ECB to loosen monetary policy, Mr. Trichet resisted. He said that the dollar was the problem of the US and his mandate was to fight inflation. Of course unwittingly Mr. Trichet caused one of the biggest oil price spikes of all time sending oil that day to its upside circuit breaker and actually fed into more commodity price inflation.

Yesterday we saw the reverse. It seems that Mr. Trichet is starting to grasp that if the EU keeps raising rates and continues to widen the yield differential with the United States, then the dollar will get trashed and commodities will soar. If The EU wants to meet its mandate of fighting inflation, it is clear that traditional interest rate increase cycle will backfire. While the Federal Reserve has a more complex mandate that includes full employment and growth and the ECB just an inflation mandate, it should now be clear that it is going to take a more coordinated effort between the two central banks if both are going to achieve their respective mandates.

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