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The Daily Reckoning

Oil prices, world markets affected by Japanese quake

Oil prices have dropped, and currencies in Japan, China, and Singapore will be affected.

(Page 2 of 3)

China’s inflation and industrial production exceeded forecasts in February. Consumer prices rose at an annual 4.9% rate in February, and industrial output increased 14% during the first two months of 2011. This data will put more pressure on China’s central bank to try and cool their economy. These reports indicate that their attempts so far have not been enough to hold off additional price increases. China, unlike Singapore, uses interest rates and reserve requirements to attempt to control inflation. Officials in the US would like to see China copy Singapore and allow their currency to appreciate in order to combat price pressures. But People’s Bank of China Governor Zhou Xiaochuan said today that interest rates will be used to curb inflation, and played down the role of currency gains. “Interest rate adjustment should not only focus on consumer-price inflation,” Zhou said today at a briefing in Beijing. “It has many other policy targets.” Zhou apparently is comfortable with the current state of the Chinese economy, and may refrain from raising borrowing costs until April. Just another reason for investors to look at Singapore instead of the Chinese renminbi (CNY).

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The natural disaster in Japan has put an end to the recent rise in the price of oil. Crude oil tumbled over $4 to below $100 per barrel as Japanese refiners shut plants. This drop was dramatic, and looks to me like some traders took advantage of the natural disaster to go ahead and take profits on the higher oil prices. Currencies that were benefiting from the higher prices (Mexico, Canada, Norway, and the UK) all were down this morning as the price of oil fell.

The Norwegian krone (NOK) had its biggest decline in a week against the US dollar on the drop in the price of oil and a report which showed that inflation had slowed. Statistics Norway reported that consumer prices rose just 0.4% in February after declining in January. Lower inflation also lowers the possibility of further rate increases by the Norges bank. Mexico’s peso dropped from the strongest level versus the US dollar since 2008 on the combination of lower oil prices and the bad weekly jobs report in the US. The US is Mexico’s largest trading partner, so the poor weekly jobs report released yesterday worried investors in the Mexican peso (MXN).

The weekly jobless claims increased more than expected here in the US, and continue to hover just under 400K. Continuing claims are staying stubbornly high, suggesting the labor market will not rebound as quickly as our Fed would like. Another report released yesterday showed that the US trade deficit increased 15% in January to $46.3 billion from $40.3 billion the month before. A separate Bloomberg index indicated that consumer confidence dropped as higher gasoline prices shook consumers.