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USD hobbled by high oil, but

In last weeks report, I suggested the relationship between oil and the USD should not be followed blindly, but it appears to still be infecting USD trading on the margins. I remain wary of following oil prices too closely to divine the USDs direction, but absent more dominant news or data it seems that is what the market is focusing on. Follow the data and the news, but keep one eye on oil. Remember, the USD can drive oil as much as oil drives the USD.

In terms of the near-term outlook for oil, I think its interesting to note that even with a key US investment banks most recent note today forecasting 2H 2008 oil prices of $141/bbl, oil was unable to sustain even a minor new high. For all the news and noise about oil, it is closing only about 50 cents higher than the prior week. Also on Friday, US Pres. Bush was rebuffed for a second time by the Saudis in his quest for more oil output. Yet oil prices still failed to register significant disappointment and could not even reach the intra-day highs. Tuesday of next week (May 20) sees the expiration of the June oil futures contract and that typically sees a fair amount of position liquidations. All in all, oil is looking increasingly toppy, and that dovetails with a USD holding the bottom of recent ranges.

Key data and events to watch next week

US data starts off on Monday with April Conference Board leading indicators. Tuesday sees April PPI and the May IBD/TIPP Economic Optimism index. Wednesday sees only weekly mortgage applications in the morning, but the FOMC minutes could spark some activity in the afternoon. Thursday sees weekly jobless claims and the March OFHEO house price index. Friday concludes with April existing home sales. Fed speakers on the US economy next week include Vice Chair Kohn on Tuesday.

Eurozone data begins on Monday morning with Bank of France April business sentiment and March Eurozone construction output. Tuesday sees German April producer prices and the May ZEW investor sentiment survey for both the Eurozone and Germany. Wednesday sees only May German IFO corporate sentiment indexes. Thursday sees only March Eurozone industrial new orders. Friday finishes out with a heavy slate: French April consumer spending; French, German and Eurozone PMIs for services and manufacturing, and 1Q Italian GDP.

UK data kicks off at midnight local-UK time on Sunday with the release of May Rightmove house prices. Then on Wednesday morning, the BOE minutes from the most recent meeting will be released, but they have been likely superseded by the quarterly inflation report. Thursday sees April retail sales and preliminary 1Q total business investment, along with the May CBI industrial trends survey. Friday wraps up with the preliminary 1Q GDP report.

Japanese data begins on Monday afternoon Tokyo-time with April Nationwide Department store sales and the start of the BOJ MPC meeting. Tuesday morning sees the March Tertiary (Services) Industry Index followed by the expected steady BOJ interest rate decision in the afternoon. Thursday morning sees the April merchandise trade balance and the Governments economic assessment in the afternoon. Friday sees only the minutes of the April BOJ MPC meeting in the morning.