Thursday August 12, 2004 - 11:14:05 GMT
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US OPEN MARKET POINTS 08-12-04
US OPEN MARKET POINTS 08-12-04
Published By: Boris Schlossberg, Fundamental Analyst
It All Comes Down To Oil
"It really comes down to oil," former Federal Reserve Board Governor Laurence Meyer said on Wednesday. "Everything is predicated on oil prices kind of receding, not being much above $40 a barrel. If it goes to $50, it's a whole new game. If it stays at $45, it's a bit of a pain." We slightly disagree. If oil stays at $45 it will be more than a bit of pain. Although, far less important in today’s data-driven, service-oriented world oil is still a major structural cost for all G-7 nations. Indeed, 95% of the world's transportation system is dependent on hydrocarbons. Furthermore, oil is quickly becoming the lifeblood of emerging market countries like China, India and Brazil whose rapid ascent to industrialization will continue to put upward pressure on the price. By now the drag of steadily rising oil prices on consumer spending have been well publicized. But as we experience the summer lull in the FX markets, we may take the time to examine some far more sinister and conspiratorial implications of permanently high oil prices on the US dollar.
For as long as international markets have existed US consumers have enjoyed the privileged position of paying for the commodity in their own currency. This dynamic allowed US to “print” dollars to pay for oil and greatly ameliorated US Current Account deficit swollen by oil imports. However, frustrated with the declining value of the dollar, which greatly reduced their purchasing power, some oil producers including Saudi Arabia began to privately float the idea of pricing oil in euros. The idea was quickly shelved after 9/11 and Iraq, but one proponent of this plan never abandoned the concept. Russia, the world’s second largest oil exporter, continued to consider the possibility. As early as August of last year. German media reported that Vladimir Putin made a deal with Gerhard Schroder for a change of pricing oil in euros, but Mr. Putin was coy in his reply, stating only "We do not rule out that it is possible. That would be interesting for our European partners." Given the fact that the recent run-up in oil was largely due to Putin government’s thuggish handling of the Yukos affair we could speculate – and speculate only- that some more ominous strategic factor is in play. If Russia does indeed decide to price oil in euros, the bearish effect on the USD would be enormous.
For now, the market seems content to follow the minutia of the day, as German and French GDP post stronger than expected numbers and put a minor bid under the euro. The US session will bring the Retail Sales which will need to beat expectations if the dollar is to have chance of stopping its slide. A big decline in oil in New York trading will also be a huge help to the greenback but if the $45/bbl price persists much longer, our far more nefarious oil scenario may come into market focus.
Key Overnight Developments
- NZD Retail Sales rise 4 times faster than projected providing further proof of robust growth and possibly of further hikes
- EUR FRF GDP beats consensus 0.8% vs. 0.6% as consumer spending perks up.
FX Spot Overnight
- EUR trades above 2250 after good GDP data in quiet uptrend
- JPY breaks 111 handle after bearish oil comments by Saudis and consolidates at 110.50
- GBP breaks 8300 to the upside in very quiet trade
- CHF trades all the way to 2550 after good Swiss consumer data and general dollar weakness
12:30GMT – (8:30 AM EST) USD Initial Jobless Claims (Aug 7) Expected at 340K, Previous 336K
12:30GMT – (8:30 AM EST) USD Advance Retail Sales m/m (July) Expected at 1.1%, Previous -1.1%
12:30GMT – (8:30 AM EST) USD Retail Sales ex-Autos (July) Expected at 0.4%, Previous –0.2%
14:00GMT – (10:00 AM EST) USD Business Inventories (June) Expected at 0.6%, Previous 0.4%
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