Oct crude oil prices this morning are down -$1.17 a barrel and Oct gasoline is -0.01 of a cent per gallon. Crude oil and gasoline prices yesterday settled higher after U.S. home prices fell less than expected along with concern that Tropical Storm Katia may strengthen into a hurricane and disrupt refinery operations in the U.S. Gulf region: CLV11 +$1.63, RBV11 +7.20. Oct crude rose to a 2-week high and Oct gasoline posted a 4-week high. Bullish factors included (1) the smaller-than-expected decline in Jun S&P/CaseShiller home prices, which signals stabilization in home prices that may lead to increased fuel demand, (2) the stronger than expected Q2 India GDP, which indicates strong energy consumption, and (2) concern that Tropical Storm Katia may strengthen into a hurricane and disrupt U.S. refinery operations in the U.S.
Gulf region. Bearish factors included (1) the stronger dollar, (2) the plunge in Aug U.S. consumer confidence to a 2-1/2 year low, which may lead to reduced consumer spending and fuel demand, and (3) the larger-than expected fall in Aug Euro-Zone economic confidence to a 17-month low, which may lead to a reduction in fuel demand in Europe. Expectations for Wednesday's weekly DOE inventory report are for crude oil stockpiles to rise +500,000 bbl, gasoline supplies to fall -900,000 bbl, distillate inventories to increase +900,000 bbl and the refinery capacity rate to fall -0.5 to 89.8%.
The U.S. ISM Manufacturing index is expected to fall back to 48.5 in August, which would signal the first contraction since July 2009, and the drop in production could weigh on the exchange rate as it instills a weakened outlook future growth. As the world’s largest economy faces a heightening risk for a double-dip recession, it seems as though the Federal Reserve will set the grounds to expand monetary policy further at the two-day meeting on September 21, and the central bank may go beyond just expanding its balance sheet further in an effort to encourage a sustainable recovery.
However, a positive development could keep the FOMC on the sidelines as policy makers expect economic activity to gather pace, and the committee may preserve a wait-and-see approach throughout the remainder of the year as inflation holds above the 2% target. Nevertheless, we may see a similar reaction to last month’s reading as risk trends continue to dictate price action in the foreign exchange market, and a dismal ISM report could prop up the U.S. dollar as it benefits from safe-haven flows.
Trading the given event risk certainly reinforces a bearish outlook for the greenback, but a positive reading could pave the way for a long U.S. dollar trade as growth prospects improve. Therefore, if the index tips higher from the previous month, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to preserve our profits.
In contrast, businesses may scale back on production as the slowing recovery heightens the risk for a double-dip recession, and the Fed may continue to talk up speculation for additional monetary easing in an attempt to stimulate the ailing economy. As a result, if the figure drops to 48.5 or lower in August, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reserve.
The expansion in domestic demands may encourage businesses to increase their rate of production, and a rebound in the ISM report may encourage the central bank to raise its economic assessment as growth prospects improve. However, firms may scale back on outputs as they face higher prices paired with the ongoing weakness in the real economy, and a contraction in manufacturing may push the Fed to expand monetary policy further in order to stem the risk for a double-dip recession. In turn, Fed Chairman Ben Bernanke may lay out a range of policy tools that will be implement later this year, and the central bank head may preserve his pledge to carry the zero interest rate policy well into 2013 as the fundamental outlook remains clouded with high uncertainty.
Gold updates extended its sharp decline, after a wave of profit-taking triggered the biggest daily drop in futures since 1980. Also pressure seen as investors took an optimistic view of how clearly the Federal Reserve will commit to supporting the economy at a gathering 2maro.
The fall came after COMEX futures for the precious metal fell over $100 on Wednesday, the biggest one-day drop since 1980. Gold faced renewed pressure on Thursday after CME Group raised trading margins on bullion futures by about 27% the biggest hike in more than two and a half years and the second increase in a month.
Fed chief Ben Bernanke is due to address central bankers at an annual symposium in Jackson Hole, Wyoming, on Friday. His speech last year laid the groundwork for the Fed's $600 billion bond-buying program to revive a sputtering U.S. economy.
Also market is eyeing on the update that Libya's Muammar Gaddafi is trying to sell part of Libya's gold reserves to pay for his protection and sow chaos among tribes in the north African country, said his former central bank governor Farhat Bengdara. There are gold reserves worth $10 billion (6 billion pounds) in Tripoli and Gaddafi could have taken some of that amount.The former central bank governor, who is a director of Italian bank UniCredit, said Libya needed $5-$7 billion as a bridging loan to get the banking system restarted and to pay for imports.
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