Morning Foreign Exchange Report : Oil Price Rally Continues to Affect Currency Rates

Published: Wednesday, 23 February 2011 08:29 BST - Written by John Cameron

STORY LINK Morning Foreign Exchange Report : Oil Price Rally Continues to Affect Currency Rates

Civil unrest continues in Libya, with independent sources estimating that over 300 pro-democracy demonstrators have lost their lives already. This number looks set to rise, with ruler Colonel Gaddafi appearing on state television last night to urge his supporters to attack the ’rats’ and ’cockroaches’ who were demanding greater freedoms in the Arab state. Gaddafi went on to comment that he would fight to the death and die a martyr. A peaceful conclusion to the Libyan insurgency appears less likely than ever.

Libya is the world’s twelfth largest exporter of oil, but provides an estimated 10% of the oil consumed by European markets, making it a key exporter. Wholesale oil prices continue to rally, with Brent crude trading above $106 per barrel during the overnight Asian session, a new 28-month high. Fears persist that the Arab uprising, which began several weeks ago in Tunisia, might spread to key oil producers Iran and Saudi Arabia. If this happened, world oil prices would be likely to break new record highs.

Rising oil prices are likely to drag other commodity prices higher, further fuelling worldwide inflation and precipitating interest hikes in Europe, the US and the UK, sooner rather than later. US policy-makers have remained consistently dovish on rates, which has subdued the Dollar. Futures markets suggest that the ECB will be the first of the three to raise rates. This was re-enforced yesterday, when ECB Governing Council member, Yves Mersch, suggested that Europe’s central bank may be forced to hike interest rates at its next meeting on 3rd March. The Bank of England releases the minutes of its February policy meeting later this morning. Analysts expect that members Weale and Sentance will once again have voted for a hike. A maximum of two other members voted to raise rates. If the minutes show that less than four members voted for an increase, then the market may downwardly adjust its expectations for UK interest rates, which would hurt the Pound. The tone of the minutes will also be closely watched.

The Arab uprising saw the sell-off in equities to continue over the last twenty four hours, with the FTSE 100, Hang Seng and Nikkei Dow all trading down, whilst in the US, the first equities session since Friday saw the S&P 500 lose over 2% on the day. Shares remain susceptible to further falls following disappointing Japanese balance of trade figures, released during last night’s Asian session.

Meanwhile, in New Zealand, Bill English, the Deputy Prime Minister, Bill English commented overnight that the Christchurch earthquake would delay the domestic economy’s recovery. For the first time in the country’s history, the government has declared a national state of emergency. The Kiwi Dollar continues to lose ground against the majors.

Canadian retail sales figures for December were released yesterday, showing a contraction in consumer spending in December. The Canadian Dollar came under some selling pressure following the release, however Canada is far from being the only developed nation to release disappointing sales numbers for December and rising oil prices should see the Canadian Dollar re-establish its recent up-trend against its counterpart currencies.

On a more positive note, yesterday’s US Consumer Confidence Survey outstripped expectations. If this afternoon’s US housing sector numbers give further evidence of an improvement in the real economy in the US, then appetite for risk could see a short term improvement, causing Dollar weakness.

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