Now why should you stress about the price of oil if you're not selling and purchasing oil? If you are neck deep into currency exchange, there's one glorious reason. The cost of oil has been a leading indicator of the world economy for a while and gurus picture that that will not be changing shortly. The link between the price of oil and the economy of many states is founded upon two simple facts : one. States with healthy supplies of crude oil benefit economy-wise from higher oil costs. Two. States who rely on imports for their energy wants benefit from lower oil costs and lose when oil costs rise. Three. As the economy of a country is strong, its currency is also robust in the currency market. Remember from basic economy courses that higher oil costs act to applied the brakes on patron spending. This follows so long as the significant source of oil for industrialized states is petrol based.
The price of all products produced hinges on the cost of a barrel of oil. In addition, the costs of individual patrons rise as they pay more to fuel their automobiles and heat their houses.
Just over last year, most pundits concluded that $40 a barrel was the higher limit for a barrel of crude oil. At the year's beginning, oil had already damaged that point, and was selling at $42.50 a barrel. The whims of the weather, world politics and precise capacity to meet demands have fueled one of the most unpredictable pricing years in up to date memory. At a previous time, the cost of crude broke $70 a barrel, an increase of 60 5 pc over the start of the year. And while prices dropped for a brief period, at the end of the year, they were still forty five p.c higher than at the beginning of the year. The more pushy are calling it at $100.
What does this imply for the currency exchange trading market? From economics 101, we all know that in the forex market, exchange rates are speculated on the condition of a country's economy. If the economy is powerful and growing, the currency rates for their currency reflect that in higher price. If the economy is flagging, the exchange rate for their currency against most other currencies also stumbles. The currency of countries that produce and export oil will rise in value. Two. The currency of countries that import virtually all of their oil and depend on it for their exports will drop in relative price . 3.
The most successful trades will involve a land that exports oil vs. A land that relies upon oil. Primarily based on those 3 points, the masters are keeping their eye on the CADJPY pairing for the best trades, and here's why. Canada had been jumping the list of the Earth's oil producers for a long time and is at present the ninth biggest exporter of oil globally. ( gasp here ) Since the millenium's turn, Canada has been the most important provider of oil to the U.S, and has been getting important attention from the Chinese market. It's envisioned that by 2010, China's import needs for oil will double, and match that of the U.S. By 2030. Now, Canada is prepared to be the largest exporter of oil to China. Their dependency on oil imports makes their economy especially susceptible to oil price fluctuations. If oil costs carry on rising, the cost of Japanese exports will be made to rise too weakening their position in the world market. Over the last year, there's been an intimate relationship with rises in oil costs and drops in the value of the yen. If economy and history are going to be regarded, the oil costs can't carry on rising indefinitely.
Finally, clients will bite the bullet and start cutting their obligation for gas and oil. When that occurs, the price of oil will either stabilize, or start heading back down toward the $40 a gallon that professionals foretold it may never hit.
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(This post originally appeared at the author's blog)
Few of the big research outfits have been as prescient as JP Morgan. At the end of January they said any downturn should be bought. With the market 6% off the lows it looks like they’re on pace to be correct. They have been big proponents of the recovery trade and have nailed the fundamental reasons to remain long. Although they acknowledge that the recovery remains vulnerable they believe it continues nonetheless:
The most important issue remains where the world economy is headed. The recovery probably started in the middle of last year. It remains vulnerable, narrow, and weak by historical standards. And it will take years to repair the damage done to public and private sector balance sheets. Our economists have rightly called this a “bounce toward malaise.”
The primary driver of the rally going forward will be the continued skepticism by investors. Although the recovery has been less than robust it has outpaced expectations and JP Morgan believes this trend will continue:
But given how low our and the consensus growth forecasts are, market participants know already that the economic future is not bright. The issue for markets is whether this collective pessimism about the future is getting worse or is slowly fading.
Although several risks have developed over recent weeks they do not see any reason why the recovery will be interrupted:
Our medium-term strategy of being long risky assets depends on both the global recovery strengthening, or at least not weakening, and fading risks and growing confidence around this recovery. Markets have focused on three sources of uncertainty—monetary tightening, fiscal tightening, and renewed delevering. Our view remains that over this year, these risks are less acute than the risk premia we are getting paid, in particular in equities.
How to play the recovery going forward? JP Morgan likes the risk trade with the exception of Europe. In forex they like the dollar going forward:
- Asset allocation: A lot of risks are bothering investors, but to us, they are outweighed by the upward momentum of global growth and earnings.
- Economics: Activity data are stronger in US, Japan, and EM, but much weaker in Europe. Inflation data are soft, signaling that central banks are unlikely to over-tighten.
- Fixed income: Stay short duration. EU support underpins EMU high-deficit markets. Turn neutral on the Agency MBS basis, from underweight.
- Equities: The risk of premature fiscal tightening hurts Europe. Companies that generate most of their revenues domestically look set to underperform.
- FX: Stay long USD versus AUD, NZD, NOK, and SEK.
- Commodities: Stay long.
Source: JP Morgan
Today’s data was a big mixed with a confusing durable goods figure and stubbornly bearish jobs data. The durable goods data missed on the headline coming in at 0.3% vs expectations for a jump of 1.6%. The weakness was primarily in aircraft orders. Ex-aircraft, orders were 0.9% higher. Despite the miss, the trend in orders is clearly to the upside:
Jobless claims continue to disappoint. Claims came in at 470K vs expectations of 440K. The four week average is up for the second straight week. Continuing claims improved, but the underlying data was mixed. Econoday notes the potential for employment set-backs should this trend persist:
“Today’s report is a disappointment pointing to no improvement, and even the risk of a set-back, for monthly payroll data. Stocks and the dollar edged lower in reaction to today’s 8:30 data that included a smaller-than-expected gain for durable goods.”
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