Forexperts

• Print
• E-Mail

Greenback Falls as Oil Surges The Week Ahead updated May 16, 2008 EUR/USD - 1.5503 Daily Market Outlook - May 16 More EUR/USD The Week Ahead updated May 16, 2008 USD/JPY Technical Analysis 16 May 2008 USD/JPY - Dollar Yen, European Session - 16/05/08 More USD/JPY

- Oil keeps moving higher, threatening growth

- Eurozone finance ministers meet next week

- Risk aversion comes back with a bang

- Key data and events to watch next week

Oil keeps moving higher, threatening growth, inflation

Oil prices gained nearly 8% this week after a US investment house issued a report suggesting a super-spike might be unfolding that could eventually see prices rise into the $150-200/bbl range. Rebel attacks in Nigeria, which temporarily disrupted crude exports, conveniently served as a nice background accompaniment to the steady grind higher in oil. Interestingly, the surge in oil defied a larger than expected weekly US inventory increase (5.6 mio bbls vs. forecast of 1.6 mio bbls), suggesting that market speculation rather than any demand constraint is actually behind the move. This makes the recent advance generally suspect and there is a lot of talk that the rally is overdone. But there are no imminent signs of a reversal, though momentum studies are overbought and currently showing a bearish divergence, suggesting potential for a reversal lower. While oil prices continue to move higher, global growth is going to be undermined and consumer sentiment will continue to deteriorate.

Rising oil prices have been repeatedly linked to USD weakness in the mainstream financial press, but that relationship appears to have largely broken down in recent weeks. Traders are cautioned against blindly selling USD if oil prices continue to gain. As well, should oil prices begin to decline, it does not necessarily follow that the USD should gain or the EUR decline. (No doubt, should the two events transpire together, oil declines will be portrayed as the result of a stronger USD, and vice versa.) Oil is its own animal and will trade according to its own market dynamic, while other forces are at work in the FX arena.

Rather than focusing on the purported linkage between oil and the USD, traders are likely better off looking at high and rising energy prices as a major drag on global growth and a source of inflation. Higher energy costs will tend to have a disproportionate effect on US growth due to the higher energy intensity of the US compared to other economies. It goes without saying that consumer sentiment has been devastated by higher energy prices, but the real pain has yet to be felt as gasoline pump price increases look to have lagged significantly behind crude price developments. But the US consumer is not alone in feeling the pressure from high energy costs, so were really talking about a drag on overall global growth. From the growth perspective, then, stock markets appear increasingly fragile after a six-week recovery that is now having a serious look in the mirror and does not like what it sees.

Turning back to FX, downside breaks in global stocks due to deteriorating growth outlooks suggest that JPY-crosses, like EUR/JPY and GBP/JPY, are likely to remain under pressure in the near term. USD/JPY, in particular, flirted with a key support zone on Friday at 102.50/60, just above the Ichimoku cloud, with the top of the cloud as the next support at 102.19. A USD/JPY drop through that 102.19-50 support zone suggests a fresh push lower below 100 USD/JPY in the near future, though the base of the cloud is at 100.35-50 next week.

Higher energy and commodity prices also fuel inflation pressures and these are being acutely felt in Asia in particular, as the region continues to function as a commodity importer/manufactured goods exporter. One way countries can offset such inflationary pressures is to allow their currencies to appreciate more rapidly. China has halted Yuan appreciation over the past month, but if oil prices dont recede soon and with April Chinese CPI to be reported on Monday, the Yuan is likely to resume gains, providing additional pressure for other Asian currencies to appreciate. Japanese officials are also less likely to resist JPY-appreciation given the sharp increase in commodity prices, again suggesting a lower USD/JPY and JPY-crosses.

• EUR / USD
• USD / JPY
• GBP / USD
• USD / CHF
• AUD / USD
• USD / CAD
• EUR / JPY
• AUD / JPY
• GBP / JPY
• EUR / GBP
• GBP / CHF
• EUR / CHF