Dean’s FX| Will Oil Prices Break down?

The USD$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

US economic data yesterday provided no ‘free love’ for the greenback and equities. The Philly Fed Manufacturing Index fell to -17.1 (reversing the rebound experienced last month) and falling lower into contraction territory. Digging deeper, one notices that new orders and shipments declined, along with employment (stronger last month). All combined suggests that a weakening US manufacturing sector will put further downward pressure on overall inflation. Similar to other data this week analysts note that an increase in prices paid added to the decline in prices received this month, which suggests that higher input costs are being eaten up by businesses rather than passed on to consumers just yet, thus limiting the impact on inflation. With this report one would expect Bernanke and his crew to stand down from hiking in the foreseeable future (2.00%). The future expectations components also showed a decline this month, but the activity component remains somewhat ‘robust’, providing evidence that economic recovery remains on the table for next year. However, the employment expectations component dropped after a strong surge last month (but remains in expansion territory for now).

Other data showed that initial jobless claims eased w/w (+381k vs. +386K), but managed to come in higher than expected, pushing the 4-week moving average up and keeping initial claims in the +370k level. This would suggest that the market can expect to see a move up once again in the unemployment rate in June. Continuing claims also eased more than expected this week, although claims remain above the +3m mark. Traders continue to speculate that these numbers can only worsen going forward. With no US economic data out this morning, one should expect a tight trading range.

The US $ currently is lower against the EUR +0.41%, GBP +0.03%, CHF +0.51% and JPY +0.13%. The commodity currencies are stronger this morning, CAD +0.16% and AUD +0.14%. The loonie continued its course towards parity once again, after strong than anticipated data yesterday. How long this direction will last despite lower commodity prices is a guess (50% of Canadian exports are commodity based). The CAD$ gained vs. most of its major trading partners as rising prices fueled speculation that the BOC will not cut borrowing costs (3.00%). CPI rose +2.2%, y/y, the fastest pace since Jan. But, not enough for the currency to move outside of its current trading range. Other data showed that Canadian wholesale trade came in much stronger than expected with a +1.4% jump in April. While price adjusted sales were up even faster at +1.9% which can only be good news for real GDP growth on the month. Excluding autos, the gain was even stronger at 1.8%. The currency once again remains susceptible to crude oil prices. Their inverse relationship should put a short term cap on the currencies strength. With very little volume going through, traders will look to sell some CAD$ near USD$ support levels once again. The AUD$ gained O/N (0.9520), traders speculate that the RBA will maintain their interest rate advantage (7.25%) over the US as the Fed is expected to delay hiking borrowing costs (2.00%).

Crude is higher O/N ($132.45 up +52c). Continued bearish news persistently weighs on crude oil prices this week. A surprise announcement by China raising fuel prices today has traders speculating that world consumer demand will decline and by default the black stuff prices will follow (lead to inflation concerns). China being the second largest consumer after the US should have a huge impact on demand and inventories. Combing this with other bearish variables of late should test technical support levels that have remained in tact for some time. This week EIA report showed that inventories declined less than forecasted, also has weighed on crude oil prices. Oil stockpiles fell -1.24m barrels to 301m vs. an estimated drop of -1.75m w/w. But, on the other hand, gas supplies fell -1.18m barrels to 208.9m compared to an expected positive number of +850k. Analysts from JPMorgan believe that the ‘bull’ run may be over and expect prices to correct themselves over the next few months. They anticipate that the price of crude will average out to $90 a barrel for this year. The Kuwaiti oil minister believes that $100 a barrel is more reasonable. It is anticipated that the Saudis (OPEC’s largest exporter) will announce on June 22nd an increase in production of an extra +200k barrels a day or +0.2% of world supply. The IEA said it seeks an immediate increase in oil output at the meeting to ‘calm markets’. Gold climbed to new weekly high yesterday as traders speculated that higher costs of raw materials will boost demand for the yellow metal as a hedge against inflation ($901).

The Nikkei closed at 13,942 down -188. The DAX index in Europe was at 6,714 down -7; the FTSE (UK) currently is 5,706 down -3. The early call for the open of key US indices is higher. Yields of the US 10-year bond backed up 4bp yesterday (4.18%) and are little changed O/N. Treasury prices fell on the back of initial jobless claims data, which implied that softening in the US labor market was not getting worse. The Government announcing that it will sell $50b worth in next weeks auctions in 2’s and 5’s also put the curve under pressure.

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