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Oil Producers feel the pinch

Currencies Direct September 3rd 2008 - 3 minute read

Oil Producers feel the pinch ……

It didn’t take long for the more radical OPEC producers to start squealing that a production cut was needed to safe-guard the $100 per barrel level. We continued the slide towards this price overnight and start the day at around 108. To be honest I would have thought that both producers and users would be more than happy for oil to stabilise at about $100 and that a reduction in ‘speculative volatility’ would enable the global economy to plan for growth whilst still allowing Manchester City to tear the football transfer market apart. As before, the Dollar was the main beneficiary of the move lower in commodities with cable and euro/dollar both lower on European opening.

We are now getting into interesting territory in the Money Markets. The OECD, in a report issued yesterday, announced that in their opinion the UK would be the only one of the major global economies that would go into recession. They predicted that the UK would see negative growth in both the 3rd and 4th quarters, the implications being that, in tandem with Prof Blanchflower’s thinking, interest rates would need to come down – and sharpish. We still think that this month’s MPC meeting will produce another split vote – possibly 3 – 5 – 1 (with 3 for a cut, 5 on hold and 1 still concerned about inflation) but that we will see a cut in October with more to come next year. With the yield curve still very much higher than official rates there will be some downshift with the likelihood that the curve itself will become negative as we head towards next year. Time looks ripe to push Sterling deposits out slightly longer before rates come down. In the US there have been calls from certain smaller banks for the Federal Reserve to increase the Discount Rate, putting borrowing costs up. This has been done before to apply a temporary brake for the economy but would have no tangible effect on Money Market rates unless the Fed Funds target rate was moved in tandem. There still looks more chance that rates will need to be eased however with the current more buoyant mood in the US proving temporary.

On the exchanges, several of the smaller Far Eastern Central Banks intervened in the Forex market to sell Dollars in support of their currencies (Malaysia, Indonesia, India and The Philippines were mentioned, whilst South Korea were verbal interventionists). The selling was not deemed to be part of any concerted action and as such likely to be just a smoothing operation to control the move. In Europe today, if commodities keep falling then the Dollar will strengthen further. We are now within the congestion area for Cable mentioned yesterday and it is probable that without a further down move in Euro/Dollar, cable’s fall will slow and profit taking could become a reality. Trouble is, in the current environment, any move back to/above the 1.80 mark will likely prove to be in market terminology ‘ a dead cat bounce’. SterlingEuro is holding on by its fingertips. There is some good data out today, with several PMI indicators from Europe this morning plus the 1st estimate of the Q2 Eurozone GDP. This afternoon we have US factory orders and after we go home, the US Fed Beige Book.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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Currencies Direct

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