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Posts Tagged ‘US dollar’

0 Nov 2 2014 @ 9:49pm by Matt Smith in Crude Oil, Economy, Global Energy

I Forget Where We Were

One of my favorite songs of this year is ‘I Forget Where We Were‘ by Ben Howard (complete with quirky guitar playing – hark, left). The song’s title has been resonating with me recently as I get a wee bit reflective as we approach the twilight of an eventful year. So much has happened across currency markets, it is easy to forget where we were. So here is a simple summation of some of the more wild and wacky rides for certain currencies, and how – naturally – all paths lead back to energy.    » read more

0 Sep 12 2014 @ 7:42am by Matt Smith in Crude Oil, Global Energy

File Under: London Buses…

I broke out my London bus tie for this morning’s appearance on Squawk Box, as bearish influences in the crude market have been like them – you wait for ages for one, and then they all arrive at the same time. Hark, click on the below mugshot to launch to the clip:

2 Oct 21 2010 @ 10:42am by Matt Smith in Economy, Global Energy, risk management

The Dreaded Greenback and The Danger (Mouse) Faced

Although currencies are one of the key ingredients on the burrito, they are treated somewhat more like a garnish (salsa or cheese) rather than a staple (meat or beans). But no more I tell you! For today we swing the spotlight onto currencies, and we do this through the villain that is Baron Greenback (aka the US dollar) from the cartoon Danger Mouse. So let’s take a look at some of the key battles that are currently underway for the big bad Baron with some of its (arch-enemies) counterparts: » read more

0 Jun 23 2010 @ 10:57am by Matt Smith in Crude Oil, Global Energy, risk management

The euro’s the one, and not the yuan.

The euro and the yuan = the Sonny and Cher of the currency markets

After the fireworks and celebrations in the streets that followed the announcement that the yuan is set to be unpegged from the US dollar to float freely, the initial excitement, like the bubbly, has now lost its fizz. What initially appeared as a selfless act of cooperation and compromise by China, has morphed into the realization that this announcement was just a mere gesture by them to avoid getting flame-grilled at this week’s G20 meeting about their position as ‘currency manipulator in chief’. While this move into the limelight firmly positions the yuan as the sexy currency du jour (à la Cher), one of its currency counterparts – the euro – is considered much less attractive (sorry, Sonny). But nonetheless, I’m backing Mr Bono (= the euro) to have a bigger influence over financial markets in the coming months, and specifically, over commodityworld(tm).

Let’s take a step back. So, what’s the big deal about letting the yuan float? It is this: China has pegged their currency to the US dollar for the past few years, which has meant their exporters (a huge driver of their economy) have been charging the world artificially deflated prices for their goods. Good if you are a Chinese exporter and good if you are a purchaser of Chinese goods; bad if you are a producer of competing goods. Unfortunately, most of the world, and especially the US and Europe, are net purchasers of Chinese goods, meaning the undervalued yuan has allowed Chinese producers to undercut domestic producers of similar goods.

Yuan renminbi vs US dollar, March 2009 - present

Letting the yuan float means it will likely strengthen versus other currencies (since it was considered artificially pegged at a low level).  

A strengthening yuan would be good for the global economy because it would make Chinese goods more expensive, hence increasing the competitiveness of other countries, and promoting the rebalancing of those economies with striking trade imbalances (notably, the US) . It should also calm inflationary fears and ease concerns of a housing bubble in China, as a strengthening yuan would be the equivalent of a bucket of cold water on the economy. However, it is more likely that China would let their currency float because they believe their economy is strong enough to be supported by domestic demand, or because of the benefits that an improved purchasing power (from a strengthening currency) gives them in buying goods internationally. Or, alternatively, they think their currency will weaken (it would be hilariously ironic if it did, but isn’t beyond the realms…).

Then what’s the big deal about the euro?
The euro is the official currency of 16 Eurozone countries. What started out as an attempt to build a superpower strong enough to rival the economic power of the US back in 1999 has ended up turning ever more sour in recent months. The weakest links in the Eurozone chain (= PIIGS) are dragging down the strongest countries in the Eurozone, as waning confidence in the collective currency is causing its devaluation. The chart below is a great illustration of the decoupling seen in the euro at the beginning of the year. While the euro tracked risk appetite during 2009, following a similar path to equities and crude oil (as an inverted flight from safety caused the dollar to weaken and funds to flow into the euro and other risk assets), the considerable sovereign default risks that countries like Greece and Spain are facing have caused a massive move out of the euro, and hence its rate versus the dollar to fall. Drawing this back to commodityworld(tm), and specifically crude, the two have become reacquainted in the past two months, and as the euro has had a relief rally in recent weeks, so have risk assets. Going forward over the next few months, the Eurozone is likely to face further and increasing default risks, which can only have a detrimental effect on the euro, and risk generally. This puts headwinds against crude oil advancing at a strong pace, regardless of the decoupling seen earlier in the year:  

Maybe I am being too cynical here; perhaps this move by China’s policymakers is a clear signal that they are willing to cooperate with the global financial community. Yet for all of the furor that the announcement has made, there has been little evidence that it will have a dramatic impact on markets (and hence commodities), in the short term at least. In the meantime, the bigger influence on commodities, and specifically crude oil, is more likely to come from the euro, which should come under further selling pressure as it struggles to find the cure for the economic illnesses infecting a number of its member-nations. As for how this will play out over the long term? We don’t know. And we won’t find out until we grow.

1 Nov 18 2009 @ 10:30am by Matt Smith in Capital Markets, Crude Oil, Natural Gas

If I had a dollar for every time crude oil was blamed for a move in other commodities, i could buy a Nano

And I don’t mean an iPod. I mean the the 100k Rupee* car. Just as people gravitate towards the kitchen at a party, journalists are subconsciously lulled into following the herd and explaining away price movements in one asset by the movement in another.

Nano Nano

Nano Nano

Granted, sometimes this is justified. For example, a flight to risky assets has been occurring for much of this year, hence a Herculean-like negative correlation between the US dollar (safety) and crude oil (risky asset). On days when the market is heading south, we see a migration to safety. A strong positive correlation also exists betwixt US equities and black gold this year – they’ve been bosom buddies, with risk-taking a-go-go.

Here comes the ‘but’…if markets and people were perfectly rational, we would be able to find an explanation as to why a market has moved in a certain way, and dictate which way it is going next. But they aren’t and we aren’t, so we can’t. Sometimes it would be more honest to say ‘hey, markets went down today because the sun wasn’t shining’ (it happens – just ask Forrest). My point being, if you’re gonna make something up, at least be creative about it.

Dollar / Crude = Yin / Yang

Crude / Dollar : Yin / Yang

This year we have intermittently seen crude blamed for the movement in natural gas, when in fact this relationship has all but evaporated. Admittedly, there have been days when gas has steered on a similar path to crude, but these days have been due to a common tide raising all boats, such as economic data. It’s simply lazy journalism to point to crude to explain regular movements in natural gas in 2009 – the relationship just hasn’t been there.

Sometimes markets cannot be justified; they react in unexpected ways, and are impossible to definitively predict – hence why we love, hate, and try to pigeon-hole them all at the same time. But my beef is this: please don’t keep blaming them on tenuous relationships. And until this stops, I will keep a mental note of all those hypothetical dollars, and dream of the Nano that could have been…

* 100k Rupees = approx. $2200