- 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 we’re 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 don’t 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.
Eurozone finance ministers meet next week
Eurozone finance ministers will gather on Tuesday evening for a regularly scheduled monthly meeting which will continue on Wednesday. Euro-area officials have generally welcomed the pullback of the EUR, but they clearly desire a more substantial EUR adjustment lower. I expect there will be some verbal intervention to that effect and I expect the EUR’s upside to remain limited as a result. I’m focused on the 1.5550-90 area as the likely extent of EUR/USD gains; strength beyond suggests another try at 1.6000. This past week, EUR/USD made a false break to the downside, briefly dropping to 1.5285, but then rebounding and closing above key support between 1.5300-40. Such a false break does increase the prospects for a further upside recovery in EUR/USD, and I prefer to use such strength as an opportunity to sell. Higher energy prices are also affecting European growth outlooks and the market is still in the process of marking down EUR and GBP in this light. Finally, several major Eurozone banks will be reporting 1Q earnings next week, and additional losses are likely, further souring the mood on the Continent. 1.5270/80 now looks to be the key downside trigger in EUR/USD, suggesting a test of the Ichimoku cloud base at 1.5170/80, below which sees sharper losses to the 1.48-49 area.
Risk aversion comes back with a bang
It started a week ago with a major US bank waffling on whether it would complete its buyout of the largest US mortgage lender and continued this week with a nearly $8 bio loss by a major US insurer. Credit market concerns and housing-related write downs are continuing and the only thing we can be sure of is that we can’t be sure of anything. News that the SEC will require investment banks to make greater public disclosure of capital and liquidity positions generated a horrific reaction in the markets. It was as if investors who were willfully ignoring the prospects of deeper losses suddenly realized they couldn’t breathe with their heads in the sand any longer. And on Friday, Moody’s was reporting that another major US mortgage lender might be shut off from funding by its foster-parents, leaving another smoldering wreck on the sub-prime highway.
This is not an environment conducive to investors bringing in money from the sidelines, but rather for the opposite. Risk aversion has come back yet again. Markets finally seem to be coming around to the view that even if the financial sector crisis is nearly over, which it probably isn’t, we still have a crumbling consumer-led economy that is going to be with us much longer. Higher energy prices are the icing on the cake, hastening a sharper contraction in personal consumption and threatening a much hoped-for recovery in 2H 2008. Heightened risk aversion will be another factor adding to pressure on the JPY-crosses in particular and stock markets more generally. I look to re-sell rebounds in JPY-crosses, using 160.50-161.50 in EUR/JPY and 202.00-203.00 in GBP/JPY as the preferred sell zones.
Key data and events to watch next week
US data next week begins on Tuesday with April advance retail sales, May IBD/TIPP Economic Optimism, March business inventories, and April import prices, followed by weekly ABC consumer sentiment at the 5 pm close. Wednesday sees weekly mortgage applications and April CPI. Thursday sees weekly jobless claims, May Empire manufacturing index, March TIC data, April industrial production, May Philadelphia Fed index and the May NAHB housing market index. Friday sees April housing starts and building permits and preliminary May Univ. of Michigan consumer sentiment. There are multiple Fed speakers next week, but only a few are addressing the economic outlook: Evans (non-voter) on Monday; on Tuesday, Fed Chair Bernanke on liquidity measures, then Yellen (non-voter), Hoenig (non-voter) and Fisher (hawkish voter).
Eurozone data does not see any major releases until Wednesday with April French and Italian CPI and March Eurozone industrial production. Thursday sees advance 1Q German and French GDP and April Eurozone CPI. Friday sees the March Eurozone trade balance and 1Q French employment. Eurozone finance ministers will be meeting beginning Tuesday evening and continuing on Wednesday. ECB Pres. Trichet will speak on Thursday morning in Vienna.
UK data begins on Monday when we see April PPI and March trade balance, followed at midnight local-UK time by the April BRC retail sales monitor and the April RICS house price balance. Tuesday morning proper sees April CPI/RPI and March DCLG UK house prices. Wednesday morning sees April employment and March average earnings, but the key will be the quarterly BOE inflation report, which will be viewed for what it suggests for the timing of the next BOE rate cut.
Japanese data begins on Monday morning Tokyo-time with April money supply and bank lending data, followed in the afternoon by the April Economy Watchers survey and April machine tool orders. There is no data of note on Tuesday. Wednesday morning sees April domestic corporate goods prices, March current account balance, and March Machine Orders. No major data on Thursday. Friday finishes up with preliminary 1Q GDP, final March industrial production and April consumer confidence.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.