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Daily Forex Strategy Briefing

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Commodity Currencies Find Support as Oil Gains

Thu, Aug 14 2008, 01:32 GMT
by Hans Nilsson

CMS Forex

Commodity Currencies Find Support as Oil Gains

• The dollar traded mixed versus its rivals Wednesday, erasing earlier gains against the Australian and Canadian dollars after crude oil prices rose for the first time in four days. The euro, trading on both sides of the 1.49-area support, was little changed in late trading. Sterling plunged after the Bank of England saw serious trouble in the UK economy but downplayed the risk of prolonged inflation.


• The USD/JPY initially fell despite contracting Japanese economic growth, but later reversed losses as US stocks pared declines and crude oil prices climbed nearly $3. Oil recorded its biggest one-day gain since July 30 as US gasoline inventories fell more than expected. The USD/JPY is between support at 108.00 and resistance at 110.50. The development in the equity market will likely determine the USD/JPY direction. If the stock market rally continues, the USD/JPY will possibly break the resistance and continue its ascent. However, the stock market is at strong resistance, so we keep our short USD/JPY position.

Financial and Economic News and Comments

US & Canada

• US import prices rose 1.7% m/m in July, on energy costs and a weak dollar, up 21.6% y/y, the Labor Department reported. US export prices rose as well, increasing concern that demand for American products abroad may start to slow. Export prices increased 1.4% m/m in July, up 10.2% y/y.

• US retail sales fell 0.1% m/m in July, the first decline in five months, driven by a sharp drop in auto sales, following an upwardly revised 0.3% m/m increase in June, the Commerce Department said. The decline signals consumer spending continues to weaken. Total retail and food services sales fell to $384.6 billion in July from $385.1 billion in June, after seasonal adjustments. Excluding motor vehicles and parts, retail sales increased a less-than-expected 0.4% m/m in July, up 6% y/y. Motor vehicle and parts sales dropped to $67.9 billion in July, declining 2.4% m/m and 10.5% y/y.


• US business inventories rose a more-than-expected 0.7% m/m June, the largest gain since January, following an upwardly revised 0.4% m/m increase in May, data from the Commerce Department showed. Business inventories rose 5.6% y/y, the highest yearly gain since February 2007. Business sales rose 1.7% m/m, matching expectation and the most since November 2007. The inventory-to-sales ratio fell to 1.23 in June, the fewest since records began 16 years ago, from May’s 1.24.

Europe

• European industrial production was unchanged m/m in June, after falling 1.8% m/m, the most in almost 16 years in May, Eurostat reported. Industrial production declined 0.5% y/y, the biggest drop since September 2003. June IP stagnation points to a protracted eurozone economic slowdown.


• The Ifo economic climate in the euro area worsened in Q3 2008 for a consecutive fourth time, resulting from less positive assessments of the current economic situation and more pessimistic expectations for the coming six months. The economic climate index fell to 61.9 in Q3 from 76.3 in Q2, the economic situation index dropped to 84.1 from 100.9, and the economic expectations index declined to 43.4 from 55.8, the Ifo Institute reported.


• UK claimant counts rose a more-than-expected 20,100 to 864,700 in July, a sixth straight month increase and the biggest unemployment rise since December 1992, following June’s upwardly revised 20,000 increase, data from the Office for National Statistics showed. The unemployment rate rose to 2.7% in July from June’s 2.6%. Growth in average earnings dropped to 3.4% in the three months through June, the lowest since August 2003 and down from 3.8% in the quarter through May.

• The Bank of England slashed its growth forecast and held out the prospect of lower interest rates. BOE Governor Mervyn King said he saw a “chill in the economic air” after unemployment rose the most in almost 16 years in July. The depreciating pound underlines concern that a slumping housing market is pushing the UK economy toward a recession. The economy faces a “difficult and painful adjustment” that “cannot be avoided. As a result inflation is rising and growth is slowing,” King said. The economy will grow about 0.1% y/y in Q1 2009, compared with a previous forecast of 1% y/y, according to BOE forecasts published today. Inflation may accelerate above 5% before slowing to just below the BOE’s 2% ceiling in two years if interest rates stay on hold, according to the BOE.

Asia-Pacific

• Japan’s GDP shrank an annualized 2.4% in Q2, the first quarterly contraction in a year, on declining exports and dropping consumer spending, after expanding 3.2% in Q1, bringing Japan to the brink of its first recession in six years, data from the Cabinet Office showed. The GDP fell 0.6% q/q on a seasonally-adjusted basis in Q2 after growing 0.8% q/q in Q1.

• China’s retail sales climbed a more-than-expected 23.3% to 862.9 billion yuan ($126 billion) in July, the fastest pace since 1999, after rising 23% in June, data from the statistics bureau showed.

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Published on  Thu, Aug 14 2008, 01:49 GMT