Sharp swings ensued in today’s FX trading, as the dollar fell sharply during the Asian session following a spike in oil prices prompted by President Bush’s announcement that he would double the Strategic Petroleum Reserve (SPR) to 1.5 billion barrels over the next 20 years. An unexpectedly low inflation report from Australia significantly curtailed chances of a February rate hike by the Reserve Bank of Australia next month and boosted the U.S. currency by a full cent. But the dollar selloff resumed, especially against the yen, dropping to a five-day low before recovering on an unexpectedly dovish report from the minutes of this month’s Bank of England interest rate decision (more below).
Does aggressive SPR buildup foretell Iran strike? Light sweet crude is down 20¢ at $54.80 per barrel, after Tuesday’s $2.48 jump to $55.04 on reports that the U.S. Dept of Energy would purchase 100,000 barrels of oil per day starting next spring. While the decision is part of the Bush Administration’s latest commitment to reduce U.S. dependency on imported oil, the aggressive approach on beefing up SPR may reflect heightened possibility of a U.S. military strike against Iran as early as March or April, at a time when U.S. navy ships are piling up in the Persian Gulf. Yesterday, markets were filled with chatter of a Kuwait-based newspaper article reporting that the U.S. will launch a military strike on Iran before April 2007, citing “reliable sources.” According to the article, the strikes would be launched from U.S. ships with Patriot missiles guarding all oil-producing countries in the region. The attacks would be planned in April, the last month in office for British Prime Minister Tony Blair. The immediate result of such an attack is a protracted runup in oil prices, which could reach the $70 per barrel mark in less than a week
The recent correlation between FX market volatility and oil price swings reflects the role of energy prices in recalibrating the FX equation. A renewed decline in oil bolsters expectations of a U.S. consumer-led stability to act as a stabilizer to housing's downside risks. The 14% decline in prices so far this year has considerably diminished chances of a March Fed funds rate cut and manifested itself across European and Asian currencies. The role of oil's rebound has been such that it took center stage in FX markets, shadowing a string of positive economic data from the Euro zone and the U.K. Aside from freeing U.S. consumers' wallets, falling oil prices have reduced the Sep-Nov trade deficit by over 17%, which is likely to contribute as much as 0.7% to GDP.
Kuwait concerned with dollar performance Less than one month after the United Arab Emirates announced it will reduce the amount of dollars in its currency reserve, Kuwait, the third Arab oil producer said it may abandon the dinar's peg against the U.S. dollar in favor of a basket of currencies to cushion the impact of a weakening U.S. dollar. Kuwait's Finance Minister Bader al-Humaidhi said in Davos, Switzerland today, ``The dollar fell a lot against the euro last year. But if we'd been linked to a basket, we wouldn't have suffered.” Kuwait, along with the five Gulf Arab monarchies has pegged its currency to the dollar ahead of a planned single currency planned in 2010.
Today’s weekly U.S. petroleum inventory figures (10:30 am) are expected to show an increase of 1.3 million barrels in crude oil, and a drop of 700,000 barrels in distillate stockpiles (heating oil and diesel).
Cable plunges on dovish minutes Sterling dropped more than 1¢ to $1.97 after the minutes of this month’s Bank of England (BoE) interest rate decision revealed a five to four vote in favor of the surprising 25-basis point rate hike. Markets had expected no more than two dissenters at the decision, especially when the consumer price index (CPI) registered a 3.0% year-over-year growth, well above the central bank’s 2.0% target. MPC members Bean, Blanchflower, Lomax, and Tucker were the dissenting voters, stating that inflation would fall during 2007. The majority said that they did not see risks to inflation falling quickly, and saw little chances of a slowdown from the rate hike. Sterling had already been under pressure ahead of the minutes after a BoE Governor Mervyn King said in a speech late yesterday that the Bank maintained its view that inflation would fall back in H2, possibly quite sharply.
The minutes shadowed the stronger than expected fourth quarter gross domestic product (GDP) figures showing a rise of 0.8% q/q and 3.0% year over year, the highest since second quarter 2004. It remains unclear whether the vocal doves at the MPC will prevent a rate hike next month.
Cable stabilizes at the 61.8% retracement of the 1.9591-1.9914 move at 1.9710. A break below the 1.97 figure is expected to stabilize at 1.9680. Key foundation stands at 1.9650. Traders must carefully watch tomorrow’s IFO survey from Germany and U.S. existing home sales for further action in cable. Upside seen capped at 1.9730, with further gains encountering pressure at 1.9760.
Aussie slumps on weak CPI AUD/USD dropped more than a full cent to 0.7810 from 0.7935 after Australia's headline CPI slowed to 0.1% month over month in December and 3.3% year over year against expectations of a 0.2% m/m and 3.6% y/y. Falling prices of commodities were largely attributed to the soft data. The figures slashed expectations of a February Reserve Bank of Australia (RBA) rate hike from as much as 80% to 40%.
We expect AUD/USD to stabilize near the 0.7805 support ahead of this morning’s oil inventory data from the United States, which could fuel the pair back towards the 0.7820s. Upside capped at 0.7840. The daily MACD suggests renewed losses towards the 0.78 figure, but support seen standing firm at 0.7770.
Euro seeks 1.2950 support The latest drop in EUR/USD is expected to stabilize at the 1.2950 support as markets stay aside ahead of the U.S. oil inventory data, which could potentially show smaller than expected builds resulting from the recent drop in temperatures. Nonetheless, the daily MACD suggests further declines to as low as 1.2920.
Buying support should emerge near the figure ahead of tomorrow’s IFO survey, which is expected to hit a fresh 15-year high at 109 in January from 108.7. Recall that the figure had been a source of sharp euro gains in the last two months, which makes a retreat very possible. Upside capped at 1.3050, followed by 1.3080, which is the 50% retracement of the said move.
USD/JPY ends little changed after wild ride A brief exodus from carry trades following the 1¢ plunge in the Aussie triggered a 100-pip drop in USD/JPY to 120.67, but renewed pressure on European FX and a brief retreat in oil boosted the USD back above 121.20 and onto 121.60. Markets may be ready to fuel fresh gains in the pair if Friday’s CPI release, due Thursday evening, shows another 0.2% y/y increase in January. The upward bias in the pair remains as such that we expect 122 to be a matter of time. Interim resistance stands at 121.80, followed by 122.20. Longer-term resistance stands at 122.60. Renewed losses seen stabilizing at 121.20
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222
a.laidi@cmcmarkets.com
