Oil Prices Remain High - 28.2.2011

FX price action showed little conviction during the Asia session, an understandable reaction to the general lack of news flow. EURUSD traded 1.3712-1.3767 and USDJPY traded 81.62-81.76. Economists expect the RBNZ to cut the OCR by 50bp at the upcoming policy meeting, in response to last week's tragic earthquake. Brent crude pushed even higher on supply concerns, and is trading at $113.88/bbl at the time of writing; gold is hovering at $1413.95/oz. Fed Governor Yellen did not sound excessively concerned about higher oil prices, noting that oil price shocks have historically generated few second-round inflation effects in the US. Richmond Fed President Lacker, a non-voter in 2011, said that oil price gains so far do not pose a risk to the economic recovery. Our US economists agree and, on Friday re-affirmed their US growth forecasts for 2011. Reinforcing their view, they note that the University of Michigan consumer sentiment reading for late February rose to 77.5 from 75.1 (cons. 75.4) despite higher oil prices. US Q4 GDP growth was revised down to +2.8% from +3.2% annualised rate. Attention now turns to Fed Chairman Bernanke's congressional testimony on Tuesday and Wednesday for any guidance on the future of the Fed's bond-buying program.

EUR

ECB Vice President Constancio said central bankers must be willing to be pre-emptive, and that the ECB remains extremely vigilant on inflation expectations. Nevertheless, he downplayed speculation that the ECB might be forced to react to the recent increase in oil prices saying that "monetary policy does not respond immediately to such a supply shock, nor should it". ECB Governing Council member Draghi said central banks are currently trying to assess whether the spike in oil prices will have a permanent effect on inflation or whether it is a one-off shock. He noted that mid-term inflation expectations remain well anchored, but that the appearance of "inflationary tensions" requires careful assessment of "the timing and methods for restoring normal monetary conditions and interest rates". He stressed that the ECB must prevent "the stimulus of international prices from passing through to domestic prices and wages in the longer term".