The dollar rides improved labour market data to rise the most against the euro in approximately 15 months, euro-contagion fears prompt leading banks to prepare post-euro contingency plans, China prepares for a hard landing and oil remains confused whether to take cue from Europe-debt or Iran-threat. Happy New Year. Even as financial markets price in the pleasant employment surprise in America, they worry about how oil will react, already up six per cent last week on Iran worries, though the last two trading days brought some Europe inspired sobering. Yet the more America’s economy grows, the more oil’s complex pricing situation is further complicated. On the one hand, Europe’s debt drama and China’s slowdown should depress the ’12 outlook. Ditto for commodity currencies like aussie, krone, loonie, etc. Yet on the other, expansion in the world’s largest economy will cause oil to rally from already high prices and challenge that growth. Remember ’08? Oil averaged $100 and induced a steep global recession.
Last year’s brent crude average was $111. Take a hint. Add to that the very real threat of war in and around the straits of hormuz and $200 brent is a very real possibility. Long-traders cite neither side’s willingness to blink first as a credible sign of a sudden hike around the corner. Downward pressure is likely to persist as Europe’s problems are going nowhere. If precedent is anything to go by, Merkel and Sarkozy’s meeting today will likely engineer little except a brief euro rally before another plunge. The road to fiscal compact is long and weary, even if repeated top-level mention brings momentary relief to the single currency. I see Greek, Italian, Spanish and (yes) French debt exploding long before a political union can emerge with Germany at its centre. And news of the likes of HSBC and Barclays simulating post-euro trading environment will push euro-specific investor sentiment further south. Do not commit to euro trading unless it’s a big, pronounced short!
Europe’s choked credit markets and imminent recession deliver an ironic kiss of death to China’s growth machine, which exports approximately a trillion dollars’ worth to US, EU and Japan. Beijing’s monetary tightening that was just beginning to trim bank loan growth, now appears mistimed. This should pile pressure on all things commodity, especially oil and copper. That much of Asia’s trade is re-routed via Chinese value addition export platforms implies Asia’s emerging economies will lead no international bottoming out this year.
What might happen to Asia, EU and also the US in case of an oil shock in the Gulf is something financial markets have strangely avoided pricing in so far. Talk of Saudis filling any supply glut for long is about as believable as the EU suddenly self-correcting its sovereign nightmare and the US continuing to grow in case Greece and Co ditch the single currency. Riyadh lost leverage with excess oil the moment Arab Spring tendencies snow-balled into its oil-rich, shia-dominated eastern provinces. Subsequent $130 odd billion face saving measures pushed up its support price to the $90 per barrel range, placing it in the Iran-Venezuela league within opec. Make no mistake. (If and) when gulf oil tension jacks up black gold, Asia stops, EU is history and US is flat for the foreseeable future.
It seems ’11 was a year of reaction to crises. This one will be one of adaptation and posturing towards new long-term realities. An interesting early-year trading finding is euro suddenly decoupling from risk trade. With risk appetite ignited by US data failing to bolster the euro, it seems a new ’12 theme has emerged. Failing a game-changer, stay short euro. And as long China is wrong-footed, use rallies to short the aussie. Trading is often too violent for a confident all-in when oil and war swing international economies, and therefore currency markets.
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Even with all of the US hype and misreporting in the media, the Euro is stronger than the dollar and will remain so. The EU economy is about $2 trillion per year bigger than the US. Don't forget Euro zone has 10000 tons of gold to back its currency in the final analysis while good old USA blew all its gold reserves to fund the futile Vietnam War and when unable to fund its liabilities switched to current fiat dollar standard back in 1971. While USA sits over a mountain of paper gold assets while the real Metal is in the hand of Europeans.
The only way the US can keep the value of the dollar up is to attack the Euro, which is happening and will continue as those last dying gasps of breath are sucked out of the dollar by the US government and the greed merchants that cannot be sated. War with Iran can push the oil price price to $200 per barrel and this could rocket up the dollar index temporarily. Based upon fundamentals dollar and sterling is in far worse position than Euro. Both Britain and America's Debt position is far worse than Euro Zone's.
Even with all of the US hype and misreporting in the media, the Euro is stronger than the dollar and will remain so. The EU economy is about $2 trillion per year bigger than the US. Don't forget Euro zone has 10000 tons of gold to back its currency in the final analysis while good old USA blew all its gold reserves to fund the futile Vietnam War and when unable to fund its liabilities switched to current fiat dollar standard back in 1971. While USA sits over a mountain of paper gold assets while the real Metal is in the hand of Europeans.
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