Forex Investment and Currency Trading

Gasoline Prices and US Inflation

Attention is increasingly turning to the energy markets. Gasoline futures rallied yesterday, spurred by lower-than-expected inventories, continuing the upward trend since the beginning of the year relative to crude oil. Improving gasoline demand along with supply cuts both upstream by OPEC and downstream by refiners are tightening gasoline market fundamentals. Gasoline demand is approaching positive yearly growth for the first time in almost a year,while jet fuel demand is showing signs of stabilization after the sharp declines of the past few months. At the same time since the beginning of the year OPEC has further implemented its announced production cuts promoting a rebalancing in the crude oil market, and refiners have lowered production tightening fundamentals downstream. As a result prices at the pump have been rising by just over 15% since the start of the year.

Markets brighten …
There is an underlying change of tone in markets this week and the optimism is building. The driver is coming from the rally in USD/JPY and EUR/JPY. This is perverse, to be sure, since the JPY is weakening on dismal economic performance. However, the market has been conditioned over the last several years that a weakening of the JPY signals an improvement in global risk preference.  Sure enough, as the JPY weakens everything that Japanese housewives like to buy … AUD, NZD, CAD, BRL, OIL, Treasuries…is doing better.  The US Treasury market, which faced a wall of supply this week, has absorbed it with only marginal damage.  A postively sloped curve, with 1yr at 1.09 and the 30 yr at 3.64 is a measure of just what a lucky tribe Americans are.  What’s more, that positive slope is a self-fulfilling prophesy of an improving economy in 6-12 months. ( Nothing improves bank results like a positive yield curve).  USDJPY looks likely to fulfill technical targets between 100.50-102.00. However, there are tax changes in the pipeline in Tokyo starting in the new fiscal year, April 1st, which will encourage repatriation of offshore earnings, a “Japanese HIA” according to some analysts. So it could get interesting as we break through par. 
 
Looking around for other “causes” for the brighter tone,  its seems clear that Mr. Bernanke’s testimony over two days has put a foundation under the market. There is a sense that Bernanke has risen to the challenge. Stepping into the game with the AIG bailout, global swaps and the TALF, Mr. Bernanke has single-handedly keep the ship upright through election day and the three-month transition. He came down in favor of fiscal stimulus in the current environment - though not necessarily the particular set of programs that came out of the Congressional sausage factory.

Trading Strategy – Back to the real economy?

The overnight surprises that stand out: 1) Australian Capex going up; 2) Talk of AIG breakup into 3 parts; 3) European deflation.  The focus on banks in the US may shift today with the market looking at real data – durable goods and jobless claims.  The fear next week of ISM and jobs reports may start today.  The USD looks vulnerable to some selling – with EUR and GBP leading the charge.  This may be tempered by the end of month fixing pressures – but its unlikely to stop a market rushing for risk.  Equity markets tried to rally overnight in Asia – and it mostly worked – while Europe holds bid.  The outlook for another rally in the US entices so EUR/JPY and other JPY crosses look to be the playbook for the day again. 

However, the value trades are worth watching – SEK particularly against the NOK and EUR may be where the best money is. The range bound nature of the market leaves many scratching their head as to whether the plans and the promises from the US administration and FED will work to beat back the gloom of the present headlines.