Newsletter Title
Oil Prices Soar
Oil Over $98
Welcome to 2008. If you were expecting the major trends of 2007 to carry on into the New Year – rising oil and gold prices and a falling US dollar – you won’t be disappointed with the first trading day of 2008. Oil has soared almost $2 today on renewed violence in Nigeria, a major oil exporter. US crude is trading at just over $98, within a dollar of it’s November 21st record high of $99.29. Nigeria is the world’s eighth largest oil exporter and the country has descended into a state of open tribal warfare resulting in a 20% drop in oil exports over the past year. Oil prices rose 58% in 2007 because of supply disruptions, inventory pressures and speculative buying by hedge funds. Crude has jumped 14% since December 6th as US crude stocks have been declining as cold weather has set in over much of North America. Weekly oil inventory data will be released tomorrow and it is expected to confirm further declines in US crude stocks.
Of course, as we saw throughout much of last year, as oil prices rise, the US dollar falls, and today is no exception, with the dollar generally weaker against most other currencies. The euro and Canadian, Australian and New Zealand dollars are the prime benefactors of USD weakness this morning. But there are pockets of USD strength as both the British pound and the Japanese yen are lower vs the dollar. Sterling has fallen about 50 cents vs the dollar this morning, and it is trading at a record low against the euro, on expectations that the UK economy is slowing dramatically and that further BOE rate cuts are forthcoming. Minutes from the BOE’s December meeting reveal committee members voted unanimously to cut the Bank rate to 5.5%. This sets up expectations for further UK interest rate cuts later this month.
Other News
The Chinese yuan continues to grind higher as the Central Bank seems intent on allowing what is being called a “mini revaluation” in order to curb inflationary pressures. The yuan has been allowed to appreciate 2.33% in the past two months as the Chinese are worried about inflation, which hit 6.9% in November. The tightly controlled yuan appreciated only 6.86% in all of last year so the recent revaluation is a significant, albeit quiet, move on the part of the government as it continues to manage the fast growing economy.
The Canadian dollar has backed away from an overnight high of 1.0139 after having a rough start to the week, falling almost two full cents in very thin trading on Monday. The loonie was the top performing tradable currency last year as it gained more than 17%. Most analysts suggest there is not much further upside potential for the dollar at this point and it is expected to trade between 92 cents and 1.02 this year depending on what the US dollar does. There are growing signs that the global economy is starting to slow and this could be US dollar positive and Canadian dollar negative. The Bank of Canada is expected to lower interest rates another 25 basis points later this month and that could weigh on the dollar over the next few weeks irrespective of rising oil and gold prices.
In terms of economic data, this week is fairly quiet leading up to the US employment report on Friday. The ISM Manufacturing Index was just released and it tumbled to 47.7 in December from 50.8 in November. The consensus estimate was 50.5 so the weaker than expected report is causing renewed USD selling this morning. There is no significant Canadian data on the calendar this week.
Have a good day.
 |
| Paul Lennox, CFA, Corporate Treasurer |
|
