Decline in crude oil price accelerated in European session after ECB council member Axel Weber signaled that the central bank will need to provide liquidity to banks through the end of the year. The duration may have exceeded some market participants had anticipated and fuels worries about the Eurozone's outlook. The single currency plunged to a 5-week low of 1.27 against the dollar. The front-month contract for WTI crude oil slumped to as low as 73.24 amid demand concerns. Relative strength in USD also lowered demand for commodities. Currently trading at 1231, the benchmark contract for gold pulls back after soaring to a 7-week high of1239.5 yesterday.
Weber said in an interview that 'most of these discussions about the continuation of the exit I think will be focused on the first quarter...It's clear that we need to re-embark on a normalization procedure'. In other words, current stimulus measures will need to continue until the end of the year. Concerning open market operations, the Bundesbank President said it's 'wise' to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of the year, which is 'usually surrounded by some uncertainty regarding the liquidity situation'. This was beyond what ECB President Trichet mentioned that unlimited 7-day loans will continue until October 12 and unlimited 3-month loans until the end of September.
Canada's CPI rose +1.8% y/y in July, following an increase of 1% in the prior month. However, the reading was below market expectation of a +1.9% gain. Core CPI eased to +1.6% from +1.7% in June. On monthly basis, core CPI contracted, by -0.1%, for a second month. The reading indicates that inflationary pressure in Canada remains mild and the Bank of Canada may pause its tightening policies after raising the target bank rate in June and July.
Despite broad-base selloff in commodities and other risk assets, wheat moved against the tide. The benchmark CBOT contract rose for a third consecutive day after the Grain Union in Russia said the country may have to import grains by more than 2.5M metric tons because of the drought. Russia used to be the world's 3rd largest exports. Meanwhile, the US wheat exports surged to a 34-month high last week. According to the USDA, net wheat export sales totaled 1.41M metric tons, up from 1.35M metric tons in the prior week.
As economic outlook has become increasingly uncertain, risks for further deterioration in market sentiment are high. Against this backdrop, crude oil has chance to weaken further but 70 level should remain intact. For gold, we believe price will benefit from concerns over a double-dip recession in global economy.