Crude Inventories: Forex Effects of the Surprise Rise

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Includes: ERO, FNMA, FXF, UDN, UUP
by: Grace Cheng

In the forex markets, EUR/USD indeed met resistance around 1.4805 and USD/CHF attracted bidding interest around 1.0890, an expected support level, during the early Asian trading session Wednesday, thus spurring a USD rebound after some weakness experienced Tuesday. EUR/USD fell below 1.4700 while USD/CHF rose to as high as 1.1040. The absence of major US data today means that USD movements are likely to track US stocks, but since the dollar has embarked onto a possibly long-term uptrend, it should have little problem holding onto its gains from today.

Besides, crude oil prices have scaled back on their gains following the Department of Energy report which showed that crude oil inventory jumped much more than expected, rising to 9.4 million barrels, versus an expected 800,000 barrels. However, gasoline inventories fell 6.2 million barrels, much more than an expected drop of 2.4 million barrels.

Today the British pound extended its losses after the Bank of England released its minutes of the August 6-7 monetary policy meeting, revealing that there was a 3-way split among the MPC members. David Blanchflower wanted an interest rate cut, whereas Tim Besley preferred a rate hike, and the remaining 5 members voted for a no-change in the Bank rate of 5%.

This month’s voting pattern was similar to July’s one, but with the further deterioriation of the housing and jobs market in the UK and drop in oil prices, there is an increased likelihood that the BOE may be forced to cut interest rates, perhaps by the end of this year. They said that a rate cut “might not send an inflationary signal” if the economy slowed enough, though it would also create the risk of faster inflation. Watch out for UK retail sales data on Thursday and UK GDP Friday.

In US stock markets, stocks of Fannie Mae (FNM) fell as much as 20% today, but then pared its losses after its CEO Daniel Mudd said in a radio interview that he hasn’t asked the US Treasury for help in funding the mortgage-finance company and the government hasn’t offered. He said Fannie Mae is getting a record amount of new business as the private mortgage market is “gone”, and that he expects Fannie to recover from its recent losses.

I’m not sure if Mudd’s reassurance attempts are calming enough for stock investors, but it’s clear that many are scrambling to get out before Paulson intervenes.

Economic Calendar For Thursday:

Eurozone PMI manufacturing 0800 GMT

UK retail sales 0830 GMT

Canada CPI 1230 GMT

US initial jobless claims 1230 GMT

US Philly Fed 1400 GMT