Oil prices running ‘amuck’!

The USD$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range, as commodity prices continue to run amuck.

The Fed breathed a sigh of relief after Friday’s data showed that their ‘go to’ variable, the US consumer is alive and well and has money in their pockets. The tax rebate of late continues to have a large impact on both personal income and personal spending last month. Real personal disposable income (after tax) jumped +5.3%, m/m (largest gain in nearly 30-years). Personal Income climbed +1.9%, m/m, while Personal Spending rose +0.8% (the previous month was also revised upwards). Expect the positive data to add to the 2nd Q real-GDP, as Real Consumption rose +0.4%, m/m. Analysts also expect further gains through out the summer as more rebates cheques are sent out. Other reports revealed that the core-PCE deflator (Fed’s preferred measure of inflation), remained at +2.1% y/y for the 3rd consecutive month while headline PCE eased again to +3.1% y/y vs. the high of 3.6% y/y reached in Nov.

This week will be highlighted by the ECB rate decision meeting (4.00%-is Trichet really that hawkish?) and NFP data on Thursday (holiday shortened week). Global equities remain under pressure as the fear of further credit losses, shattered consumer confidence, combined with CBankers having to co-ordinate monetary policies to combat inflation worries remains to the fore. The USD$ continues to trade under pressure despite better economic data of late. Speculators are ‘hell bent’ on achieving a $150 print in oil prices by weeks end. Investors continue to seek safety and have aggressively unwound ‘carry’ trades and purchased US government debt. There is very little good news to report, as inflation fears dominate any growth concerns. The problem is that no-one knows how to tackle the problem nearly one year on from the initial the sub-prime and credit market debacle. What an interesting 3rd Q we will have, did we really expect a quiet summer in the FX land?

The US $ currently is lower against the EUR +0.31%, GBP +0.01%, CHF +0.51%, JPY +0.99%. The commodity currencies are stronger this morning, CAD +0.20% and AUD +0.55%. The loonie remains within its tight trading range despite the Fed holding rates steady last week and record oil prices (commodities account for more than 50% of Canada’s exports). It remains to be seen if the CAD$ will play catch up or remain guilty by proximity and association with the US economy (more than 75% of its exports head south of the border). Technically and fundamentally the loonie should be stronger, but, perception seems to have the upper hand at the moment. Many analysts expect the currency to trade close to parity this week. Last weeks change in US monetary policy will reduce pressure on the BOC to cut its borrowing cost (3.00%) after standing pat earlier in the month. Currently, technical support remains intact close to 1.0050-75 levels, but corporate Canada remains better buyers of their own currency on USD$ advances. Expect commodity prices to dictate short term movements for now. The AUD$ printed a 25-year high (0.9651) as the price of the nations commodities climbed to new records. The RBA are expected to keep rates unchanged at tomorrows meeting (7.25%). Record commodity prices will have traders buying on pull backs, but expect the currency to continue to falter vs. JPY on the cross as investors pare ‘carry’ positions.

Crude is higher O/N ($142.81 up +260c). Records are to be broken and every day ‘black gold’ seems to achieve this. Year to date, crude has climbed nearly 50%, as the greenback struggles against most of its trading partners. This week should be no different, as the fear that Trichet may hike rates will only add to the pressure on the USD$ and by default speculators will continue to purchase commodities. Other variables continue to add to the rapid rise of crude of late. Libya has threatened to cut production and OPEC’s President predicting that crude prices could hit $170 a barrel by summers end. Qatar last weekend has not sided with the Saudis, they do no plan to increase production, along with Libya they believe that the world is over supplied. President Khelil from OPEC believes that if the ECB hiked rates (similar to a Fed ease) the net result would be another surge in oil prices. Last weeks EIA report surprised the market and showed that inventories increased for the first time in nearly two months. Stocks rose +803k barrels to 301.8m barrels w/w. The market had expected a routinely decline of around -1.1m barrels. Both the UAE and the Saudis said they would boost supplies to the market if needed. But, certain OPEC members like Qatar believe it’s not necessarily a supply issue but a refinery process concern. Expect geo-political concerns to continue to influence the market in the short term. Gold prices remain robust ($936 up +460c) and hit monthly highs this morning as record energy costs boost demand for the ‘yellow’ metal as a hedge against inflation.

The Nikkei closed at 13,481 down -62. The DAX index in Europe was at 6,339 down -82; the FTSE (UK) currently is 5,541 up +12. The early call for the open of key US indices is lower. Yields of the US 10-year bond eased 6bp on Friday (3.97%) and are little changed O/N. Treasury prices had advanced aggressively all of last week, pushing down yields the most in 5-months as plunging global equities steered investors to seek shelter in the fixed income asset class as the fear of ‘credit’ losses worsen. Some analysts expect bonds to continue their rally in the 3rd Q.

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