The IEA calms down Gustav fears and helps the USD recover

The USD is mixed after conflicting economic indicator releases. The Economy expanded faster than expected in the 2nd quarter (3.3%) vs. an estimated 1.9% boosted primarily by exports. Consumer spending has increased 0.2%, and personal income declined 0.2% as doubts about the US economy’s strength keep pressuring the currency yet again.

FX Heatmap August 29th, 2008

The US$ currently is weaker against the EUR 0.22%, , CHF 0.28% and JPY 0.77%. and weaker against GBP -0.02%

The commodity currencies are stronger this morning, CAD 0.24% and AUD 0.28%.

The CAD gained some ground after Gustav is set to hit the oil platforms in the Gulf of Mexico but the gains were limited as the IEA pledged to cover the losses with its own stocks. Commodities across the board benefited from the weakness of the USD. Canada’s exports are 50% commodities based, which explains the current gain of the Canadian currency. Despite weaker Canadian fundamentals of late, investors will continue to closely monitor commodities direction for investment guidance. Uncertainty remains in the Credit Industry as Canadian banks have posted less than stellar results. Canada’s largest bank RBC reported profits that were below analyst’s forecast. For now in this current climate expect traders to be better buys of US$ on pullbacks.

The AUD gained (0.8643) as investor’s were undecided about Australian assets, but as traders start betting that the RBA will cut rates (7.25%) on Sept 2nd the currency flows headed to the NZD which gained vs. the AUD. There seems to be a collective agreement that there will be a rate reductiont, but now the market is expecting a less aggressive 25bp points reduction as the Australian economy seems to be more resilient to the current economic climate.

Crude is higher O/N ($116.63 up 104c). Geopolitical and weather concerns pushed the black stuff upwards in a very volite market. The IEA announcement to tap its strategic stocks to cover the potential losses caused by Hurricane Gustav stopped the oil rally. The US is awash with the ‘black stuff’ so demand is not an issue, but the certainty of demand is quickly becoming one. The platforms in the Gulf of Mexico produce a fifth of US Oil production. Oil companies have started to get employees off platforms and Louisiana has started evacuation procedures. Gustav is the first tropical storm of this magnitude to hit Texas and Louisiana since Katrina in 2005. Geopolitical concerns in Russia/Georgia, Nigerian and Iran will continue to keep Oil bid even tough the commodity’s fundamentals do not support higher oil prices.

Gold gained ($841) as the US$ fell vs. the EUR, thus boosting the appeal of the ‘yellow metal’ as an alternative investment.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza