The major theme that we are seeing this week is the sharp slide in oil prices, along with other commodities, which is pressuring risk sentiment and causing “risk-off” trading. Investors and traders, concerned about the prospects of a slowing global recovery are moving our of riskier higher yielding currencies like the EUR, GBP, AUD, CAD and into safe haven currencies like the USD, CHF, and JPY.
Oil prices are sliding on concerns that the global recovery will be slower than anticipated, as fears build that desptie all the tightening China has done already, more will be necessary following the release of its inflation and bank lending data earlier this week. Higher margins to trade oil on the CME also contributed to the fall, though right now poor risk sentiment is driving oil further down.
Oil was pressured yesterday by a 3.8 million barrel climb in crude oil stockpiles in the US, which puts downward pressure oil prices. Also the IEA lowered its forecast for how much oil will be used during the summer US driving season as a result of higher gas prices.
From MarketWatch: “In its monthly oil report released Thursday, the IEA said preliminary March data suggest near zero annual growth in global oil demand for the first time since the summer of 2009.
“While March estimates are probably distorted by exceptional events in Japan and the timing of Easter holidays, nonetheless $4-a-gallon gasoline is likely to yield an anemic U.S. driving season,” the IEA said. “This is the main change to our demand forecast — a weaker 2011 profile in North America.”
Gold slid from a high overnight of $1,506 to $1,477 and silver fell from $35.90 to a low of $32.30, as the sell off in commodities extending into a second day and into a second week. That severely undercut demand for commodity currencies like the AUD and CAD.
In addition to falling oil, gold and silver, here are some events that contributed to weak investor sentiment.
1. China Hikes Bank’s Reserve Ratio Requirements – The news that China’s inflation continued to run above a 5% annual rate raised concerns that the People’s Bank of China would further its tightening campaign. They did not wait too long to move one of their levers to control money flow and that was to hike yet again the amount that banks have to hold in reserve compared to total deposits – the reserve ratio requirement (RRR). The RRR will climb by 0.50%, the fifth hike this year, and brings the RRR to 20.75%. While this may not have immediate impact on currency markets it buttresses the case that Chinese officials will further their tightening campaign.
2. Soft Output Data from UK - Industrial production data from the UK was soft for another month as March’s output reading for manufacturing and industry came in weaker than expected. The Office for National Statistics said industrial production increased 0.3% in March from February (forecasts were for a 0.9% increase), which followed a 1.2% drop in February. On an annual basis, industrial production expanded 0.7%. Manufacturing production was up 0.2%, lower than the 0.3% expected. The Pound was pressured on the news.
3. Weaker Euro-zone Production Data as Well - In the EUro-zone, output was also weaker than expected, with industrial production declined 0.2% for the month of March, undershooting forecasts of a 0.4% increase. In February production climbed by 0.6%. The drop here was led by weaker output of capital goods, a sign that orders for machinery were down – a sign that business investment may have faltered during the period.
We now start the NY trading session with key reports on tap including retail sales, producer prices and jobless claims. Can US data turn around the “risk-0ff” dynamic? It might be hard at this point, but if sales come in strong it could make the case that despite concerns about global growth, the US is showing improvement as a result of a labor market that is on the mend. Still, any weaker data will only exacerbate the feeling of risk aversion.
Nick Nasad
Chief Market Analyst
FXTimes
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
