What Sky-High Gas Prices Means for the Euro

Joined : 23 Dec 2007 Posts : 217 Location : Nigeria

Today's commentary is by Sean Hyman, Currency Director and editor of The Money Trader.

Good Day Currency Traders! Very Happy

Oil prices have gone sky-high in the past few months. And we're all feeling it at the gas pumps. In fact, gasoline prices just broke out to all-time highs.

Sadly, it's not even gas season. If this were in July or August, we'd expect higher prices right? Traditionally, tourists take road trip vacations in the summer, and that drives up gas demand and prices.

However, you'll notice in the chart below that we're normally in a "seasonal dip" around January to February. Usually, gas prices don't spike until April - September. Yet it's February and we're hitting new all-time gas highs.

This means we'll be facing even higher gas prices, when the "real" summer driving season finally gets here.

Gasoline Prices Hit an All-Time High in a
Seasonally Slow Period

Kick the economy, when it's already down, why don't ya? Like we needed another setback.

Higher Gas Prices = the New IRS Tax

Higher gas prices are just like the IRS increasing your tax bills. You've got to pay up or else. After all, you're not going to quit driving to work or to get groceries. You're not going to quit taking your kids to school, etc. There are many things that consumers could stop buying to "lighten their load" but gas is definitely not one of them.

So by this summer, consumers will be shelling out even more at the pump. Even more money will fly out of consumers' wallets. That, in turn, leads to less discretionary buying in the retail market place.

This could dampen retail sales in the upcoming months as gas prices drive even higher.

Companies Get Smacked with High Gas Prices

Here's one other thought: Transportation stocks are usually the first to recover after a recession. But these companies will also have to pay more to keep their UPS and FedEx trucks on the road too. So while they'll eventually come out of this recession, it won't be an easy recovery.

Higher gas prices will practically guarantee that. So where do we go from here?

Well, the economy will stay sluggish a bit longer. That will also have a prolonged "slowing effect" on the global economy.

A Slowing Economy Can Shoot
Down a High-Flying Currency

Lofty currencies in a slowing economy are like lofty stock prices when earnings are slowing across the board. When earnings slow, these stocks stand to drop the most since people were "pricing it to perfection." cheers

Well, this same thing will happen to currencies. High-flying currencies like the euro will be hit hard. The lofty euro exchange rate with the dollar will have to come down.

Everyone already knew that the U.S. economy was slowing down and that's already factored (priced) into the currency's price. However, in Euroland, ECB President Trichet has acted like all is well.

So traders haven't "priced in" an economic slowdown there yet. As they start to do this, the price of the EUR/USD exchange rate will come down. This will also end up bringing the EUR/JPY exchange rate down along with it.

So look for "euro selling" to become very popular soon. bounce

Making 'Cents' of the Headlines
Dollar Bears Will Soon Start to Question Themselves

What's Happening:

Last week, the U.S. Retail Sales number came out stronger than expected. Is the consumer still alive? Evidently so. Retail Sales came in at 0.3% vs. -0.2% expected and it really beat the reading of -0.4% last time. Even more importantly, the Core Retail Sales came in at 0.3% vs. 0.2% expected. This is much better than the reading of -0.3% previously.

So at this point, we can't tell if these retail numbers are a "one hit wonder" or the sign of the consumer pulling itself up. In the next couple of months, we'll see if this is a sustainable trend or not. If it is, then the consumer is spending again and that would be a good thing for the U.S. economy.

Also yesterday, the Eurozone released its Industrial Production numbers. They came in at a disappointing -0.2% vs. 0.5% expected. Ouch!

What I Say:

On top of that, the German ZEW Survey from institutions came in with a very bearish sentiment. Data like this will soon make euro bulls question their "one way bet" against the U.S. dollar.

I know the dollar is flawed and has some huge obstacles in the long run. I won't argue with that. However, even in "bear markets" in a currency, there are rallies. You're about to see one of them over the upcoming months in the greenback.

Sentiment has gotten "overly weighted" to the downside on the dollar and "overly bullish" on the euro at the moment. So in the near term, the dollar will gain on the euro. However, in the longer, bigger picture (upcoming years) the euro will still have an edge on the buck.

So the EUR/USD will roll over and head south in the upcoming months as the U.S. slowdown drags Europe down with it. Check out the last 40 days of trading in the EUR/USD and you'll see it's already starting.

40 Days and 40 Nights of the EUR/USD