We are all Dollar Traders, We are all Euro Traders
If you are going to trade oil it is time you admit that one of the strongest fundamental factors driving the market is the value of the dollar and the underlying confidence in that currency. While the critics of speculation spout off that the fundamentals in the oil market have gone away the truth is that the most important fundamental is the perceived value of that piece of paper.
Yesterday with all other fundamentals on supply and demand and risk to supply seemingly priced in, the focus for oil was squarely on the dollar. Yet not only the dollar, but the dollar as compared to the euro currency. The euro strength that had driven the carry trade and the recent commodity price spike was mainly caused by the market's perception that Europe was going to continue to stubbornly raise rates while the U.S. stood pat. Yet when EU President Jean Claude Trichet signaled that the EU might be on pause, that caused the major commodity sell off that we saw last week.
The euro weakened further as Angela Merkel took a tough line with Greece. The euro looked even weaker as the International Monetary Fund blasted Greece and the European Union and warned that the Greece debt crisis might spread.
The dollar seemed to rally on pride that perhaps it was regaining its superiority against the euro. Yet that all changed when in mid-morning trade in the US. the IMF blasted the US. Antonio Borges reminded us not to let our heads swell too much by saying that the U.S. fiscal situation needs unprecedented adjustment to fix its "fiscal situation." That comment took away the dollar mojo and once again shifted the commodity markets downward momentum. Oil in fact reversed and actually closed higher because of these comments. Now add to that stronger than expected economic data in Europe and the euro looks a bit stronger.
Now in a normal world, that would be a decisive factor in snipping a commodity rally, yet news out of China may be dampening that buying enthusiasm. China's central bank raised the reserve requirements for Chinese banks to a whopping 21 percent. This is the fifth time that China has raised the requirements, and as we know it has only a temporary impact on commodity prices.