The US dollar is starting the new calendar year on a stronger footing with the dollar index on course to increase for the fourth consecutive trading day and hitting a high of 98.796 overnight. The main development over the weekend were the actions taken by the Trump administration to force regime change in Venezuela by forcibly removing President Nicolas Maduro. However, the initial market impact has been relatively muted. Market participants will be mainly watching the impact on the price of oil to assess the potential broader financial market impact, and spill-overs into the foreign exchange market. The price of Brent has dropped modestly overnight moving back closer to recent lows at around USD60/barrel perhaps reflecting relief some initial relief that supply is unlikely to be significantly disrupted in the near-term. Venezuela has become less important for global oil supply after decades of economic mismanagement. It is currently only the 18th largest oil producer at around 1 million barrels/day which accounts for just 1% of global supply. It compares to production of around 3.5 million barrels day in the 1970’s. There is optimism though that Venezuela could become major producer again if regime change proves successful in unlocking untapped potential and helping to boost global oil supply. Venezuela still claims to hold the world’s largest proven oil reserves although much is extremely heavy making more costly to extract and process.
It remains to be seen how successful regime change will prove to be in Venezuela. Delcy Rodriguez, the acting president of Venezuela, extended “an invitation to the US government to work together on a cooperation agenda, aimed at shared development, within the framework of international law, and to strengthen lasting community coexistence”. It follows a warning from President Trump that “if she doesn’t do what’s right, she is going to pay a very big price, probably bigger than Maduro”. He wants “total access” to oil to rebuild the country. The pick-up in geopolitical risk has helped to support in the price of gold after the sharp correction lower at the end of last year. Overall, we are not expecting the developments in Venezuela to have significant implications for our FX outlook in 2026 consistent with the initial muted market impact.
USD/JPY VS. SLOPE OF JGB YIELD CURVE
Source: Bloomberg, Macrobond & MUFG GMR
