Libyan Situation Stirs Crude Oil

22-02-2011

For over a month it has been discussed that risk appetite has set the tone for the broad marketplace and helped make the EUR and GBP stronger against the USD. However, while the U.S. was on holiday yesterday and most of the currencies traded largely in place, risk appetite suddenly took a hit. News from the political crisis developing in Libya roiled late night trading as investors began to react to the problems that are developing and the price of Crude Oil jumped. The rise in the price of Oil sent a shiver through Asian markets early today and took the EUR lower against the USD. The AUD also lost value against the USD, even as Gold continued to be bolstered by what appears a run to safe havens. How long this safe haven situation will last is the obvious question, but pronouncements from some in the Libyan leadership warning about ‘civil war’ certainly did not calm the hearts of investors worldwide. Libya is a major Oil producer and if the price of Crude continues to rise, this will put a serious hurdle in front of the U.S. and Europe while they try to get their economies growing.

The USD which was very quiet all day long gained on the EUR, GBP, and other currencies as investors sought safety. Going into today’s European session it will be more than interesting to see how trading develops and the bourses should be watched as a critical barometer. As the Americans return from their holiday yesterday, they will be greeting by the S&P/CS Composite-20 HPI and the CB Consumer Confidence reading. But investors will be hard pressed to turn their attention away from the saga developing in North Africa and even as market participants look at U.S. data they will have to balance their outlooks carefully. The U.S. releases Existing Homes Sales data tomorrow and the Preliminary GDP figures loom at the end of this week. The USD which has been trading to the lower side of its weak mid-term range against the EUR the past month, the Greenback has the possibility of being seen in a different light today – that of a safe haven if a wave of caution sweeps through the markets.

The EUR was stable all day long on Monday and was literally standing in place until early morning Asian trading when volumes started to increase and traders began to react to the rising price of Crude Oil. Germany and France released their Flash Manufacturing and Services PMI reports yesterday and they turned in slightly better marks than anticipated, but were not stellar overall. The German Ifo Business Climate reading turned in an outcome of 111.2, which was slightly better than the estimate. The U.K. produced no major data yesterday and traded much like the EUR. The Public Sector Net Borrowing report will be released today. However, the Sterling and the EUR will both likely trade under the risk umbrella of political tension that is developing in the Middle East and the questions that surround the possible impact of volatile Crude Oil prices. Both the EUR and GBP have been quite strong the past two months against the USD and still stand near the higher sides of their range. Traders who have a stomach for speculation today will get an opportunity to test their perspectives.

The JPY has been steady. On Monday its range was rather consolidated and early this morning the JPY has remained fairly constant. The JPY has historically gotten stronger if safe haven trading becomes strong and it will be interesting to see if the JPY starts to gravitate back to the strongest parts of its range against the USD.

The risk appetite torch that has been so apparent in trading the past few weeks will come under a critical test today and the remainder of this week, if the political tension that is enveloping North Africa and the Middle East continues to spark public reactions between governments and their people. The prospect of rising Crude Oil prices could have a large impact on major economies that are trying to find their footing in a tough climate mired by high debt and austerity. Investors more than anything else crave stability and if they believe storm clouds contain more than rain, the broad markets could turn nervous. Traders will certainly be able to test risk appetite today.

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