NYMEX crude oil contract closed down $1.46

The Oct NYMEX crude oil contract closed down $1.46 at $107.89, despite the US Energy Dept weekly report showing a drop in crude reserves and gasoline. But demand is forecast to keep falling, so even a arose-than-expected outcome is okay. Bloomberg reports that the “daily average implied fuel demand so far this year is down 4.1% at 19.9 million barrels from a year ago.” Oil industry analysts call this “demand destruction.”

So far today, oil is down to $106.37 at 11:22 am GMT, which puts it down 27% from the July 11 record high at $147.27. No wonder funds are pulling out. We would like to hear what Jimmy Rogers is saying today. Earlier in the price drop, he said “it will come back.”

To throw a little cold water on the oil forecast, Hurricanes Hannah and Ike are closing on the US to make three in one week, for the first time since 2005 when Katrina ruined New Orleans.

Bye For Now

Barbara Rockefeller

US dollar to wobble a little on payrolls

Foreign Currency Exchange Outlook : In addition to the Mortgage Bankers’ delinquency report today, the payrolls report is the dominant factor. Forecasts range from ADP’s drop of only 33,000 (private sector) to a drop of 75,000 (Market News survey) or 100,000 (Bloomberg), but some private forecasters see 125,000. We guess the impact of data on how far it diverges from the forecast, but with the US Dollar exchange rate so strong today and breaking historic milestones, we imagine payrolls would have to be vastly worse to stop the dollar freight train, like 125,000-150,000.

Even so, these are not terrible numbers when you consider the meltdown in the real estate and financial sectors, and in comparison to the size of the US economy and workforce. Besides, as data yesterday showed, productivity is simply wonderful, up to 4.3% from 2.2% in the revised Q2 version. Unit labor costs fell 0.5%, a revision from +1.3%. And the Aug service sector ISM rose over the boom/bust line to 50.6 from 49.5 with easing price paid (72.9 from 80.8). This is a resilient economy that no other can match. Currency Analysts have been saying that the dollar is rising because the euro is falling on fresh bad data about the European slowdown, but it’s not as one-sided as that. The US dollar must be getting some support from the good data in the US, too.

Another view comes from RBS Greenwich Capital, whose chief economist says "This is not a flight to quality, it is simply a flight. Gold for example has failed to benefit, cash is king -- even the greenback, warts and all, or the yen, zero rates and all." This is a less rosy way of viewing things but valid. What if investors flee to dollar paper and then decide they like it there?

We expect the US dollar to wobble a little on payrolls but probably not to spike both ways as it usually does. This is a freight train. As we said at the start of this move in August, we need to Think Big about this move. The idea of 1.3350 is not at all silly. We have a harder time with the yen going to 100, which is unjustified on any grounds other than carry trade unwind panic, but never mind.

Bye For Now

Barbara Rockefeller

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Currency Traders perceive that the Euro is fading

Foreign Currency Exchange Outlook : The big event of the data week is US payrolls tomorrow. Market News gets a forecast range of –40,000 to –110,00, with a median estimate of –75,000. The unemployment rate will probably rise to 5.8% from 5.7%, although we all know it’s actually more like 7-9% if we were to count everyone not counted under today’s procedures. ADP announced it expects a drop of only 33,000 for the private sector, which is (again) a nice outcome, if it turns out to be true. Recession? What recession? Having dissed the recession idea, it’s also true that employment tends to be a lagging indicator and that means the uncertainty can drag on for another 6-12 months.

Retail sales are important as a barometer of the consumer’s mindset. This morning WalMart reported Aug sales up 3% for same-store sales open at least one year, when 1.6% was the industry forecast and WalMart itself has forecast 1-2%. Hmm.

Some folks doubt that the US dollars move has any lasting power, despite its size and force. This is to mistake economic analysis for a sound basis for currency forecasting. Currency traders are a wild combination of economic ignorance and yet astuteness about underlying conditions. Start talking anything beyond stockbroker economics and you get a yawn -“don’t bother me with the facts.” But currency levels are often a leading indicator of what is really going on in relative conditions. Right now currency traders perceive that Europe is fading, and thus they seize upon every negative release as evidence, from IFO to retail sales to contracting GDP. They also think that if the US doesn’t founder under a bigger financial crisis from GSE’s or another source, its basic adaptability and robustness far outpaces Germany’s, impressive though Germany may be today. They have already made the decision that the dollar deserves to be at a higher level than July’s 1.6040, and to predict that they will lose that conviction or change their minds would require certainty of exactly what event or development could cause it.

Since nobody can name such an event, forecasts of the imminent demise of the dollar rally are based on prejudice and hot air, not reality. As George Soros keeps trying to tell us, the price trend itself is a factor, and often the strongest one.

Economic analysis takes a distant place behind.

So, keep the faith.

The trend is your friend.

Bye for Now

Barbara Rockefeller

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chartists say the back was broken on the oil price rally

The Oct NYMEX crude oil contract closed at $109.71 after hitting a low of $105.46, down over $13 from the high at $118.60. Wow, that’s an abnormally wide high-low range. Stocks rose and other commodities, including steel, copper and grains, fell. See the gold chart - it closed at $805.00 from the high at $840.70, another very wide range. We know a drop in demand is partly behind the drop in oil and commodities, but the price declines are excessive relative to the drop in demand. This gives us the familiar analytical problem of pondering whether a bursting bubble is quantitatively or qualitatively different from a normal cyclical reversal. They always overshoot, too.

We remain dependent on the weather for the oil price forecast. Now that Gustav has weakened,
watchers are turning to Hannah and Josephine forming in the ocean. While chartists say the back was broken on the oil price rally by the drop under the 200-day moving average and the May spike low, a “target” of $100 (or $80) is still just an idea without any real basis.

Bye For Now

Barbara Rockefeller

falling euro simply good for exports

Foreign Exchange Currency Outlook : The dominant factor remains the price of oil, although everyone is holding his breath to hear what the Saudis have to say ahead of the OPEC meeting next week. It does not benefit oil producers to send their customers into recession, which obviously just cuts demand, and this is something the Saudis constantly remind its fellow producers.

The other big factor is the relative weakness emerging in other economies compared to the relative resilience of the US economy. Canada and Australia, for example, are under pressure in part because of commodity price declines but also a perceived global slowdown (and the two are related). Today Australia reported Q2 GDP up only 0.3% after 0.7% in Q1, a tad under forecast if still a respectable 2.7% y/y. The data has no meaning in its own right-it’s the interpretation that counts. Currency Analysts said it’s the slowest growth in three years, so let’s Sell the Australian Dollar. We saw the same thing with pound sterling, where the CIPS PMI registered an improvement but the number is still under the boom/bust line of 50, so it must be “bad.”

Context is everything.

We could be in for a Shock tomorrow when Mr. Trichet gives his press conference after the ECB -policy meeting. In addition to remarks from Steinbrueck and Juncker, the Dutch central bank stability review today probably gives the consensus outlook, as Market News reports, “Inflationary pressures limit the ability of major central banks to respond with monetary policy to slowing economic growth…” The ability of central banks to respond to economic cooling is limited. It’s also unusual to have slower economic growth accompanied by higher inflation—it’s not the normal cyclical pattern. Let’s blame emerging markets for goosing commodity demand when they themselves have inelastic supply (what a smart observation).
We don’t know whether Trichet will use the important word “vigilant” but it probably doesn’t matter. We expect him to sound hawkish, whatever the choice of words, and that is going to upset some market players, who erroneously think that one quarter of negative growth is going to get the ECB to cut rates. We are 90% certain it will not. We could easily see a foreign exchange traders buy euros if Trichet sounds particularly exasperated as forecasts of rate cuts when he has gone to so much trouble to signal the market that their expectations are wrong.

But having issued that warning, the technical currency traders are out in force. As each milestone gets passed, whether a Fibonacci number or previous low or whatever, additional players throw in the towel on the US dollar-negative stance and embrace the dollar rising story. We have no trouble at all seeing the Jan low of 1.4365 getting broken, whereupon everyone will start talking about the psychologically important round number 1.4000. It may not be a straight-line move, but it seems unlikely that even Trichet can derail it now—now would he want to. Europe has gone past the point of wanting an ever-higher euro for the sake of credibility and more pragmatically today sees a falling euro as simply good for exports, even more inflationary than they would like.

Bye For Now

Barbara Rockefeller

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Crude Oil opens the floodgates of stop-loss selling

The Oct NYMEX crude oil contract closed on Friday at $115.46, near the low of $115.00, before we knew what Hurricane Gustav would do. It took forever but the storm finally made landfall on Monday but only as a Force 1 hurricane. By late Monday, oil was down to $111.25 in electronic trading and by today, it had fallen a stunning $10 to a five-month low of $105.46 this morning. Bloomberg reports that it rose back up to $108.29 at 11:32 am London time.

We have a number of observations on this outcome. First is that the price has broken the May low by going under $110. Surpassing a previous low opens the floodgates of stop-loss selling. We wrote a piece for the Sept 1 issue of Currency Trader magazine making the case for oil falling to a “normal” $75-85 range (and the US dollar tagging along to the 1.4400 level).

Access to the magazine is free, by the way.

Second, this is a textbook example of how existing sentiment prejudices a price outcome. If sentiment had still been for higher prices, we would be seeing higher prices on the halt in US production and the cost to oil producers of stopping, cleaning up damage, and starting up again. As it happened, the oil companies are already inspecting their Gulf platforms and may resume production right away, this week, so instead of talking about the loss of production, we are looking at a glass half-full. Compared to Katrina, it is half-full, so this is the right way of looking at it, but it’s no stretch of the imagination to see the alternative scenario.

Now that the bias has changed, it will take a barricade of Mack trucks to halt it.

This is the context in which we need to view the OPEC meeting next week in Vienna. OPEC is almost sure to cut production now that prices have fallen so far (28% from the peak of $147.27 in July), although we have yet to hear the official Saudi stance. If Saudi Arabia keeps its promise to produce flat out, it almost doesn’t matter what the others decide. Price may be affected only a little, and the main fallout could be a dent in Saudi leadership. Besides, who wants to cut production? Iran.

Bye For Now

Barbara Rockefeller

We say that foreign exchange traders are wrong

Foreign Currency Exchange Outlook : Three things seem to be on the table this week - the price of oil, US nonfarm payrolls on Friday, and the latest OECD forecasts. Yes, the OECD. We pay attention to the OECD only when it suits us. The OECD is a political hornet’s nest whose output has to be sanitized so deeply that most of the time, it has thrown the baby out with the bathwater. This time it has cut forecasts for growth in the UK and eurozone by a lot, projecting the UK will get growth of only 1.2% this year, implying the second half will be flat or a contraction. For the eurozone, growth will be 1.3% (from 1.7%), just avoiding the technical definition of recession.

Meanwhile, the US got an upward revision, from 1.2% to 1.8%, due to the surprisngly good Q2 data. As we point out from time to time, growth counts. Over the long run, currencies tend to be positively correlated with the relative rate of growth of the economy. The country with the higher growth gets the stronger currency. This observation is fraught with exceptions and qualifications. Higher growth generally brings higher inflation and thus the real interest rate has to reflect growth + inflation for the “rule” to work.

In the US today, we hardly have interest rates reflecting a relatively better growth outlook than the UK and eurozone. But the implication is that the US “should” have those higher rates (while the UK and eurozone “should” have lower rates to goose growth). Foreign Exchange Traders sometimes trade on what should be rather than what is in front of their face. The ECB meets this week and is expected to leave rates on hold, but since foreign exchange traders think the ECB “should” be thinking about rates cuts—the Bundesbank’s Mr. Weber notwithstanding—Mr. Trichet is sailing against the wind to speak hawkishly and mention vigilance against inflation.
In other words, foreign exchange traders will again assume facts not in evidence. They are simply unwilling to believe that the ECB has a single mandate, inflation. They want the ECB to respond to growth worries and reject repeated ECB assertions that it will not heed slow-growth data.

It’s seemingly not “natural” for a central bank to be so single-minded.

We say that foreign exchange traders are wrong.

The ECB is that single-minded.

As Market News reported on Friday, the ECB is likely to remain on hold for the remainder of the year. Funny, so is the BoE, which also meets Sept 4 but is not expected to cut rates this time (from 5%). Instead it is proposing some goofy minor patch-jobs on the margins of the housing market, a semi-pinko effort at a solution that will end up being adminstered unevenly and result in fresh distortions of allocations.

Why is the Bank of Englaind not cutting rates?

At a guess, it wants to be seen as equally anti-inflation as the ECB.

The OECD says the ECB should remain on guard against rising core inflation, the Fed should continue to support the economy against financial constraints, and the BoJ should remain on hold against deflationary risks—in other words, no change. We feel it is unlikely that nothing will change in the next four months…

It’s official - we were right to say we can afford to think Big. We can see no real reason for the dollar not to correct to midway down the euro’s uptrend since Oct 2000, or 1.2176.

The intermediate low in that super-move is 1.1639 in November ’05. Why not?

Bye For Now

Barbara Rockefeller

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