Here are the far reaching effects of hurricane Katrina on consumers
US Dollar
To our surprise, the dollar has completely
shrugged off the potential damage of Hurricane Katrina. Yes, Katrina has been
downgraded to a category 1 storm from a category 5 storm and oil prices have
retraced as a result, but it is too early for her complete damage to be
correctly assessed. We think that today’s price action is more a result of a
lack of liquidity due to a London market holiday than sensible price action.
The long-term consequences of higher oil and natural gas prices is a problem that
has not yet been resolved and the latest uptick in prices only exacerbates the
potential strain that the higher costs could have on consumers. Oil production
platforms across the gulf have been closed causing October crude oil futures to
hit a high of $70.80 a barrel during Asian trading. Since 30% of US oil is
produced in the Gulf of Mexico, the disruptions down south are particularly
alarming. According to analysts contacted by the Financial Times, “12% of US
crude oil production capacity and roughly 10% of total US refining capacity was
shut down.†There are rumors that some of the refineries were particularly hard
hit; the FT reports 1.8 m barrels a day of capacity has been shut down by the
storm, which means that it may take weeks for them to be brought back to normal
operating capacity. At a time when oil supplies are already dwindling and spare
capacity evaporating, this oil supply shock could be disastrous for oil prices
in the medium term.
However, the big story today was not oil but natural gas
futures, which leaped over 14% to a high of $12.07 per million btu. Even though
prices have abated thanks to the reopening of the Henry Hub gas gathering
facility, these higher prices could be very difficult for US consumers to bear
in the coming months. Over 57% of Americans heat their homes using natural gas
and it is already estimated that the rise in natural gas prices could cause
heating bills to be anywhere from 15-20% higher this winter. Unless the
government taps into the country’s Strategic Oil Reserve, there seems to be no
respite ahead for the US consumer (It seems that the President is indeed mulling
over temporarily “lending†supplies of crude oil to refineries to tie over
delayed shipments). Retail gasoline prices continue to creep higher with a
gallon of regular grade gasoline reaching $3.96 on Catalina Island in Southern
California. According to the EIA, the average price of gasoline in the US for
the week of August 22 is $2.612, which is a 10% rise over the past 2 weeks.
Sooner rather than later we expect that these high costs will have a major
impact on the US economy and the US dollar. Like the University of Michigan
consumer confidence survey reported last week, tomorrow’s Conference Board
Consumer Confidence survey could also take a sharp dive, which would give dollar
bears a reason to reinitiate their short positions.
Euro
With London traders out on holiday, the markets,
dominated by US traders were naturally distracted by the developments in the
southern part of the United States. However, it is still important to mention
the particularly strong consumer confidence survey released from Germany this
morning. According to the Gfk survey, consumer confidence rose from an upwardly
revised 3.2 to 3.4 in the month of August. The economic outlook portion of the
report also rose to the highest levels in at least 6 months with an equally
sharp rise in the “willingness to buy component.†This trend of improving
Eurozone data is nothing new at this point. For the most part, the markets
remain relatively upbeat about the health of the Eurozone. We have a barrage of
labor market data due out of the region on Wednesday as well as the German
retail sales report. Most of these reports should continue to reflect a trend of
improvements.
British Pound
No economic news on the front for the U.K.
economy as few traders contemplated recent inflationary comments by Bank of
England Governor Mervyn King. Over the weekend, King commented on currently
stable inflation and hinted at the fact that given an unexpected shock to the
system, inflation volatility could pickup and subsequently stray violently from
current targets. The BoE Governor additionally warned that it “would be unwise
to count on inflation expectations remaining stable.†The warning was issued
behind the belief that given consumer expectations, inflationary perspectives
may be allocated too much weight thus rendering central bankers powerless when
called to lower benchmark targets. Ultimately, this may spur speculation that
interest rates would indefinitely rise as a result of attempts by policy
officials to control inflation, a basic tenet of the BoE. With that said,
traders are looking forward to the net consumer credit report on Wednesday.
Expected to rise to GBP1.5 bln, policy officials are carefully monitoring the
figure since it became a stated concern several months ago.
Japanese Yen
With Japanese yen moving primarily on rising
energy prices today, traders are looking to the data due tonight and tomorrow
for a deeper look into how the Japanese economy is faring. Over the next few
days, economists are anticipating personal income, household spending, retail
trade and industrial production data. Expectations are rather mixed with some
figures pointing to a slight retracement from earlier signs of growth while
others look to experiencing that lift. One such report is the workers’ household
spending figure. With 60% of the economy based on consumer spending, the figure
may offer some additional sparks of optimism as individual consumption assisted
in propping up the world’s largest economy in 2004-2005. Comparatively,
political waves are still being made leading up to next month’s election.
According a poll by Asahi newspaper, Koizumi’s LDP party has been losing some
previous popularity since the election was called in August. This could
adversely affect the equities market and undermine confidence as many had
previously believed a sure win for the political party. However, with the
counter DPJ party garnering popularity, the reform plan looks to find some
considerable resistance in one form or another.
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading. Kathy has vast experience within the
interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.
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