Oil Slips Below $106

Friday, March 28, 2008 3:58:54 PM - Crude oil closed below $106 as concerns of supply disruption by violence in Iraq have eased. Light sweet crude for May delivery closed at $105.62, down $1.96. Crude dropped as low as $104.71 in mid-morning trading.

Oil climbed to a 10-day high on Thursday after a bomb blast caused an explosion at a pipeline in the southern Iraq city of Basra. Reports surfaced of a second bombing later in the day, sending prices higher again.

Crude also rallied on Wednesday following the release of the weekly inventory report that showed stockpiles unexpectedly remained the same. The report from the Energy Information Administration showed that crude oil inventories were unchanged at 311.8 million barrels. Analysts had been expecting crude oil inventories to increase by about 1.7 million barrels.

Crude oil approached its 10-day and 20-day moving averages with the slide. Stochastics and the RSI showed neutral levels for May crude. If prices turn higher, the next upward target is the high crossing of March 18 at $108.90. That came on the April contract's final day before expiring.

On the economic front Friday morning, the Department of Commerce released its report on personal income and spending in the month of February, showing that personal income increased by more than economists had been expecting. The report showed that personal income rose 0.5 percent in February compared to a 0.3 percent increase in January. The increase exceeded the estimates of economists, who had expected personal income to increase by 0.3 percent.

Also, the University of Michigan released its consumer sentiment index for March. The index edged lower to 69.5 in March from 70.8 in February, which was down from January.


Dollar Stable Versus Other Majors After Consumer Spending, Inflation Data [EUR/USD]

Friday, March 28, 2008 3:17:40 PM - The dollar gained on the sterling but saw little movement versus the euro and sterling on Friday in New York. The buck was stable as concerns about the mindset of the US consumer were offset by the release of relatively tame inflation data.

Data from the Commerce Department revealed that personal income increased by more than economists had been expecting, but consumer spending grew an an anemic 0.1 percent, confirming fears that the US consumer are feeling the pinch of problems in the housing and credit markets.

The report also showed that the Commerce Department's closely watched reading on core consumer prices edged up 0.1 percent in February after increasing by 0.2 percent in each of the four previous months.

The dollar extended its gains from the previous session amid more signals that the UK economy has weakened significantly. The buck rose to 1.9920, up a cent from its early levels. Traders reacted to data showing that UK economic growth slowed more than estimated from the prior year in the fourth quarter of 2007.

The Office for National Statistics announced that the annual economic growth for the fourth quarter slowed to 2.8% from 3.1% in the third quarter. The growth for the fourth quarter was revised down from 2.9% initially estimated.

The dollar moved roughly sideways versus the euro, trading between 1.5750 and 1.5850 for most of the day. The dollar stayed near its record low of 1.59 from earlier in the month.

The consumer price index for Germany in March 2008 is expected to rise by 3.1% from March 2007, according to data release by Destatis on Friday. Compared with the previous month, the index is up 0.5%. Annual CPI was a bit higher than expected, with analysts having predicted a 2.9 percent increase.

March's preliminary CPI number came in much higher than the 2.0% maximum rate established by the ECB's margin for price stability. Earlier this week, ECB President Jean-Claude Trichet amped up his hawkish rhetoric, saying that euro zone inflation is expected to remain significantly above 2 percent for most of 2008.

The greenback bounced back and forth around the century mark versus the yen on Friday, slipping to 99.40 in late afternoon dealing. The pair has seen little movement over the past 2 weeks, with the dollar attempting to stabilize after dropping to a 12-year low of 95.70 on March 15.

In Japan, core consumer prices, excluding fruit, fish and vegetables, increased 1% year-on-year in February, adding to the Bank of Japan's concerns about controlling inflation. The overall CPI rose 1% in February, also rising for the fifth straight month. February marked the fifth consecutive month for CPI growth. January's gain was 0.8%. Most economists predicted the February increase would be 0.9%.

Euro Could Replace Dollar

Two American economists recently conducted a computer simulation to determine how the role of the US Dollar as the world's reserve currency will evolve over the next decade. Their hypothesis- that the Dollar's preeminence would be maintained- was contradicted by the simulation leading them to conclude that the Euro will overtake the Dollar within the next 10-15 years. This may be hard for many analysts to stomach, since the Dollar's share in global currency reserves is 66%, compared to the Euro's 25%. In addition, the Dollar has held its title for nearly 150 years, and it's difficult to fathom its being replaced.

However, two factors have emerged within the last 10 years, lending support to the argument. First, the US twin deficits have exploded; the current account deficit approximates $800 Billion and the national debt is estimated at $9.4 Trillion. Second, prior to the inception of the Euro, there didn't exist a credible alternative to the Dollar. The Deutsch Mark and Japanese Yen initially seemed like potential candidates, but the German currency was folded into the Euro, and the Japanese economy has soured and taken over by deflation. Then there are peripheral factors, like US monetary policy, which is facilitating inflation and eroding the Dollar. There are also signs that a neo-imperialist foreign policy has overstretched the US, and foreign Central Banks are becoming nervous. The Financial Times reports:

Many developing countries will find it harder to maintain their dollar pegs. They may be reluctant to drop them now but there will come a point when the rise in inflationary pressures becomes unbearable.

Mid-Day Report: Dollar Steady after PCE, Sterling at New Record Low against Euro

Dollar remains steady in a generally quiet market after the release of Feb Personal income and spending report. While personal income rose more than expected by 0.5%, spending growth slowed sharply to a 17 month low of 0.1%. Both the headline and core PCE deflator rose 0.1% mom. Headline PCE deflator slowed slightly from 3.5% yoy to 3.4% yoy while core PCE deflator was unchanged at 2.0%. Note that real spending, thus, was unchanged in Feb and is taken by some economists as another sign of a recession.

Sterling remains the main focus of today after a series of weaker than expected economic data. Gfk consumer confidence slumped to a 15 year low of -19 in Mar. Nationwide house price dropped more than expected by -0.6% mom in Mar, slowing the yoy rate sharply from 2.7% to 1.1%. Q6 GDP growth was revised lower rom 2.9% yoy to 2.8%. Though current account deficit was narrower than expected at -8.46b. Sterling weakens sharply across the board and hit new record low against Euro at 0.7929.

Dollar Still Near Record Lows

The dollar is still trading near its record low value against the euro today, but it has managed to recover somewhat from the yesterday’s fall after the oil prices corrected on the increased oil inventories in U.S.
Fed chairman Ben Bernanke’s testimony to the U.S. congress showed that there are possibilities for the housing and employment markets to weaken even further and that the risks for the financial markets and banking sector still remain high.
This testimony added more confidence to the investors that the interest rates in U.S. will be lowered again in March and most probably by 50 basis points.
ING Financial Markets is forecasting a rate cut by 50 basis points during the next FOMC meeting on March 18. This rate cut will continue to pressure on the U.S. currency, depreciating it against currencies with the higher benchmark rates.
Today EUR/USD slid down from 1.5119 to 1.5092 after the yesterday’s massive gain of more than 136 pips on this currency pair.

South Korean Won Corrects against USD

South Korean won was among the other Forex traded currencies that triumphed over the U.S. dollar during this week as the USD was losing its ground on many areas. But today USD/KRW corrected from its almost two-month bottom.
The current account deficit in South Korea is seen as one of the most important monetary problems recently and while the dollar is losing because of the widening interest rate difference, the demand for the dollars in Korea is still very high.
Bank of Korea along with the major market analysts predict a further increase in the national current account deficit, based on the soaring oil prices and a decline in a global demand for the Korean goods. The South Korean deficit of the current accounts in January was at its highest value since 1997.
USD/KRW is trading at 938.25 as of today 10:01 GMT. It closed at 935.24 yesterday and is now showing more than 0.3% gain, even when the U.S. dollar is experiencing losses against the other world currencies.

Australian Dollar at 24 Years High

After one of the worst weeks for the U.S. dollar and the attraction of the large capitals to the high-yielding assets this week, the Australian dollar reached its record high value against USD in 24 years.
AUD/USD touched 0.9496 two days ago — it was the highest level since March 1984. The overall weekly gain wasn’t very impressive (under 0.9%) because the currency pair corrected significantly on Friday.
Aussie remained the second best performing currency against the U.S. dollar among the 15 most traded currencies in February, as the Fed cut the interest rates and the participation in carry trade against dollar increased.
The yield advantage of holding the Australian dollar over the U.S. dollar is currently very attractive — 4.00% now and a high probability that the Fed will make it even wider (4.50%) in March. The high interest rates in Australia are the main reason, which will keep the national currency strong in the near future.