Dollar's Weakness Helps Support both Oil and Gold Prices


"Gold price continues to trade steadily above $950 and the benchmark futures is expected to record a 3rd consecutive weekly gain. . ."

Crude oil price edges slightly higher to 61.5 in European morning stock market stabilizes after a sharp fall. Without much economic data released today and macro outlook remains the same, we view the recovery as technical.

UK's FTSE 100 Index changes little after the government confirmed that GDP contracted -1.9% qoq, the biggest decline since 1979, in 1Q09 as consumer spending tumbled amid rising unemployment and global recession. Benchmark indices in Germany and France edge higher by around 1% so far.

Fighting in Nigeria continues and it reduces oil production in the area by more than 50%. According to Petroleum Minister of State Odein Ajumogobia, daily production has lowered to around 1.6M barrels, compared with normal capacity of 3.2M barrel. As there is no sign of a ceasefire anytime soon, modest supply tightening should offer some support for oil price.

The dollar continues to sink deeper after Boston Fed Chairman Eric Rodengren said that recovery may be slow in the world's largest economy. In a speech in Massachusetts, he said that credit tightening in banks and increase in saving rate in households will prolong the recovery process. Moreover, labor market in the U.S. remains weak with unemployment rate continuing to rise. The dollar plunges to 1.395 against the euro, 0.783 against the Australian and 1.1278 against the Canadian dollar. Although the pound has been pressured after the potential credit downgrade, it still managed to hold up against USD.

While USD has been well-known for trading in opposite direction with gold, it has demonstrated consistent negative correlation with oil price. Such a relationship was probably due the USD-denominated nature of oil and energy products. For instance, if the dollar falls, oil looks cheaper and the corresponding demand increases. With supply remaining the same, oil price has to go up to reach a new demand/supply equilibrium.

Gold price continues to trade steadily above $950 and the benchmark futures is expected to record a 3rd consecutive weekly gain, mainly driven by weakness in the dollar and a rise in inflationary expectation.

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