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Dollar Weakness Amid Low Fed Funds Rate Buoyed Commodity Market

Thu, Nov 5 2009, 05:47 GMT
by Oil N' Gold Team

Oil N' Gold

Oil price rose to as high as 81.06 after a report showed that crude inventory surprisingly drew more than -3mmb last week. Further decline in USD as the Fed kept its dovish stance also provided a favorable environment for oil prices' rally. However, investors remained uncomfortable as price surged above 80 and profit-taking was seen thereafter. The benchmark contract settled at 80.4, up +1%.

Crude inventory declined -3.94 mmb in the week ended October 30 as imports fell sharply in the Gulf Coast. Inventory drew -3.7 mmb in that region alone. Moreover, refinery runs moved down further to 13.97M bpd, the lowest level since February.

Gasoline stockpile dropped -0.29 mmb and demand rose +1.8% to 9.015M bpd in the week. However, demand at such level remains below monthly averages of 9.05M bpd for September and October. For distillate, stockpile fell -0.38 mmb. The draw was smaller than expected and demand slid -1.8% to 3.57M bpd. In short, oil product inventories were not as bullish as the prices showed.

Gold price advanced further to the north amid weakness in USD and speculations on more central bank purchases. The benchmark contract jumped to as high as 1098.5 before settling at 1087.3, up +0.2%.

The Fed decided to keep it policy rate unchanged at 0-0.25% in November. Same as previous meetings, it's stated in the accompanying statement that the interest rate will stay extremely low for an extended period. More explicitly though, the Fed indicated that 'low rates of resource utilization, subdued inflation trends and stable inflation expectations' warranted the decision. Before this meeting, the market had tried to anticipate when the Fed will change the phrase 'for an extended period' to 'some time' or others that suggest possibility of rate hike. These speculations probably dissipated after this meeting as there's likely no change until the 3 'conditions' mentioned above show solid improvements.

Policymakers probably felt more comfortable about the economic situation judging from the wordings they used to describe the market development. Moreover, the Fed also reduced to amount of agency debt purchase from $200B to $175B. Different people can have different interpretation of the action but the Fed said that it's more of a technical adjustment rather than a move to exit from stimulus policies.

The dollar weakened against major currencies as there's no hope for a rate hike in coming months. The USD Index plunged to 75.64 Wednesday. Specifically, USD dropped -1.1% against the euro, Australian dollar and New Zealand dollar and -0.9% against the pound.

Published on  Thu, Nov 5 2009, 05:47 GMT