DON'T QUIT - A MANAGEMENT THOUGHT

When things go wrong, as they sometime will,
When the road you're trudging seems all uphill,

When the funds are low and the debts are high,
And you want to smile, but you have to sigh,

When care is pressing you down a bit -
Rest if you must, but don't you quit.

Life is queer with its twists and turns,
As everyone of us sometimes learns,

And many a fellow turns about
When he might have won had he stuck it out.

Don't give up though the pace seems slow -
You may succeed with another blow.

Often the goal is nearer than
It seems to a faint and faltering man;

Often the struggler has given up
When the might have captured the victors cup;

And he learned too late when the night came down,
How close he was to the golden crown.

Success is failure turned inside out -
The silver tint of the clouds of doubt,

And you can never tell how close you are,
It may be near when it seems after;

So stick to the fight when you're hardest hit -
It's when things seem worst that you mustn't quit

"Quitters never win
Winners never quit".

Courtesy - "Companies don't succeed - People do!" by Graham Roberts Phelps

HOW WILL CURRENCIES BE AFFECTED BY RISING OIL PRICES

How Will Currencies Be Affected By Rising Oil Prices

• Higher Oil Prices - USD ($↓) JPY (¥↓) EUR (€ ↑) GBP (£↑)
  

Why Are Oil Prices Rising So Sharply?

• To understand how currencies will be impacted by rising oil prices, it is important to first understand why oil prices have been rising so sharply recently. The price of oil surged through $41 a barrel recently, to its highest level in history, that key technical level seems to send a signal of even slower world economic growth to come. Widespread economic concerns continue to weigh on investors, heightened by fears that oil supplies could be disrupted by an escalation in Middle East violence. Evidence of this is clear from recent attacks on oil terminals in Saudi Arabia and Iraq as well as the latest assassination of the Iraqi Council Governing Leader. Even worse, all of this uncertainty is occurring when supplies are extremely tight and demand continues to grow at an alarming rate. A strong non-farm payrolls report catapulted the price of oil higher based on the assumption that the economy is improving and the Fed will begin raising rates. In turn it bolstered the outlook for fuel consumption in general. Thus the price broke through the key psychological and technical $40 level and has now proceeded even higher. Oil had a brief sell off on profit taking, and also on comments from OPEC members, regarding increased production. Often these are false promises that never come to pass so the market continued its run higher, causing prices to reach all time contract highs. Oil has been trading above $30 a barrel since late last year and the pump price of gasoline has been at a record high across the U.S. and Canada. The rising cost of oil has been crippling to fuel-sensitive industries such as airlines and truckers. However, motorists have shown little sign of reigning in their consumption. OPEC, which accounts for about one-third of world oil production, already exceeds its projected daily production by an estimated 2 million barrels, but it has had no impact on lowering prices. The oil cartel is now coming out again with talk of increasing production prior to their next meeting on June 3rd in Beirut. Traders are skeptical that an increase will not be of any immediate help.
  

How to Determine Oil Price Impact on Specific Currencies

• Here is a framework to determine how higher oil prices will impact certain currencies: How dependent on oil is a particular country? A country’s dependency is very important in determining how its currency will be impacted by a change in oil prices. Intensive energy users (or net oil importers) will be more negatively impacted than other countries. Falling oil prices benefit consumers in the same way as tax cut, while higher oil prices act like a tax hike. For corporations, higher oil prices can translate into lower profits. Countries with alternative fuel sources, and other resources have the ability to switch from strict oil dependence to other energy sources, which helps to reduce their exposure and sensitivity. Monetary Policy Responses How reactive a country’s monetary policy authorities are to rising inflation is also very important in forecasting a currency’s reaction. Countries with inflation targets may be more aggressive at combating inflation and will adjust their monetary policies accordingly, while others who may be dealing with low inflation will keep monetary policy accommodative to guard against slower growth as a result of higher oil prices. Monetary policy and interest rates are key drivers of currency movements. Does the economy have a large oil-related market cap vs. industrial market cap? Market cap composition may also influence how the oil price affects a currency via capital flows. The currencies of countries with a low energy-related market cap, but a high industrial market cap is more likely to be hurt by higher oil prices. Investment flows may be muted by the decreased profitability of these types of industries. Countries with heavy manufacturing and high levels of oil imports will most likely have the most exposure. Key Factors Are Growth & Inflation - Oil Isn’t The Only Factor Driving Inflation... Inflation has been creeping up everywhere. The Bank of England recently raised its main interest rate by a quarter of a point, citing the need to keep inflation under control. The ECB left its interest rate on hold at 2%, signaling its concern over inflation and is calling on OPEC member countries to act responsibly on oil prices. However, inflation isn’t only driven by high oil prices. In the US, higher prices for everything from chemicals and food to industrial commodities and labor are hitting the US economy hard. As the US economy sputters trying to gain momentum, employers are faced with more and more obstacles. Costs are skyrocketing across the board. Employers are faced with rapidly rising expenses including severance, health insurance, vacation pay and referral bonuses – all of which rose 6.9 % over the past 12 months, compared with a rise of 6.1% in the prior year, according to the latest figures. The employment cost index, a gauge of labor expenses for businesses and government, climbed 0.8% in Q4 according to the Labor Department report. Benefit costs rose 2.4 % from January through March - the largest rise since Q3 of 1982. U.S. costs for labor jumped 1.1 % in the first quarter, as benefits costs rose by the most in more than two decades. Looking back from the early 70’s forward, there are observable and dramatic changes in GDP growth in relation to changes in the world oil price. The price shocks of 73-74, the late 1970s/early 1980s, and early 1990's were all followed by dramatic recessions, which have then been followed by a rebound in economic growth. The pressure of energy prices on aggregate prices in the economy created problems for the economy as a whole. The chart below of oil prices and GDP 12 months forward clearly shows the effects of higher oil prices on GDP. There have been three global recessions in the past 30 years, and all of them were pre-dated by a sharp rise in oil prices. Higher oil prices are already hurting the global economy and could further hamper growth, bolster inflation and increase unemployment over the next two years if prices stay at their present levels. According to a recent study released by the International Energy Agency (IEA): “If oil prices stay at their current level of more than $35 a barrel, more than $10 a barrel above their level of three years ago, world GDP would be at least half of 1% lower -- equivalent to about $255 billion -- in the year following a $10 oil-price increase.” So with the threat of inflation looming it’s important to consider the monetary policy reactions of the global central banks.
  

Which Currencies Will Most Likely Be Negatively Impacted By Higher Oil Prices?

• The USD ($↓) and the JPY (¥↓)
  

Dependency on Oil - The US and Japan are the world’s two largest net oil importers. Skyrocketing oil prices will have a particularly damaging effect on the economic recoveries in both countries by effectively threatening to stall growth. Fed Chairman Alan Greenspan has already warned that rising oil and gas prices could have a significant impact on the long-term development of the US economy. In the case of Japan, their lack of domestic sources of energy and their need to import vast amounts of crude oil, natural gas, and other energy resources makes them particularly sensitive to changes in oil prices. Japan also lacks the flexibility to switch to nuclear power because they are a huge net importer of uranium for their nuclear power plants. In 2001, the country's dependence on imports for primary energy stood at more than 79%. Oil provided Japan with 50% of its total energy needs, coal 17%, nuclear power 14%, natural gas 14%, hydroelectric power 4%, and renewable sources a mere 1.1%.

Monetary Policy - Aside from their high reliance on external oil, the Federal Reserve and the Bank of Japan are also more likely to focus on growth rather than inflation. Both countries have been grappling with very low levels on inflation and even what may be considered deflationary conditions. U.S. inflation is now only about 1.4 %, within range of the 2 % to 2.5 % deemed as acceptable by most economists. It's also below half the average of the last 20 years -- during which the economy was in recession a total of five quarters -- and a third of the rate during some of the most prosperous years of the 1980s. With inflation so low the Fed may refrain from increasing rates out of fear that rising oil prices will hurt deflation. In fact, some feel the economy would be well served by inflation. First, producers of goods and services could impose minor price increases that translate to higher profits and potentially higher pay for workers covering some of the increased expenses. Second, it would take the rate above its current ultra-low level. If inflation were to remain at its current level, the economy would rise then fall into deflation in the next go round. Most economists agree deflation is a more difficult problem to fix with monetary policy than inflation, because consumers hold off making purchases today anticipating prices will be lower tomorrow. Unfortunately with interest rates already at such low levels the Fed has a limited ability to combat deflation. After all, interest rates cannot be set below zero.

Which Currencies Will Most Likely Benefit From Higher Oil Prices?

- EUR (€ ↑) and the GBP (£↑)

Dependency on Oil – The United Kingdom is a net oil exporter and stands to benefit from rising oil prices. Although their oil exports are relatively small, they are not subject to the same net ramifications as oil importers such as the US or Japan. On the other hand, Germany and France, the two largest countries in the Eurozone are net oil importers. Germany's crude oil imports, especially from Iran have been climbing drastically since the year 2000. Another Eurozone country that may suffer from higher oil prices is Italy. Almost 60% of Italy's energy comes from oil, most of which is imported. Gas accounts for another 30% of energy use. So Italy is exposed to a great deal of price exposure from rising oil prices. However, according to a Eurozone source, the robustness of global growth and the expansion of international trade remain stronger than had been expected a few of months ago and thus help to soften the blow to eurozone economic growth resulting from higher oil prices. At the same time, inflationary risks are being contained in part by positive wage developments in Europe. Another windfall for the Eurozone is that the EU holds 7.3% of proven coal reserves, 16% of the world's capacity for refining crude oil into petroleum products, and 16% of the world's electric generating capacity. In addition, the Eurozone is making diligent efforts to increase the role of renewable energy sources in the EU fuel mix. In 2001, renewable energy accounted for 6% of EU energy consumption. The EU aims to derive 12% of the group's gross energy consumption from renewable fuels by 2010, according to the 2001 Directive on renewable energy sources. Renewable energy sources are defined as wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and bio-gases.

Monetary Policy – More importantly though are the forecasted monetary policy reactions of the Bank of England and the European central bank. Both monetary policy authorities are particularly concerned with rising inflation. The minutes for the May 5/6 monetary policy meeting at which the BoE raised rates by 25bp indicates that inflation is forecasted to rise by such a quick pace over the next two years that the BoE even contemplated raising rates by 50bp in May. Should oil prices continue to rise, pushing inflation higher, the MPC would be expected to take initiatives to curb inflation. In the Eurozone, the ECB is traditionally a very active fighter of inflation and tends to take aggressive action in staving it off, far more so than the US. This may explain the ECB’s strong resistance to further rate decreases and the hawkish press conference by Trichet on May 6th. Continual rallies in oil will give ECB officials more reason to argue against the politicians advocating another rate cut to support growth.

Caveat - Changes May Be in Store for How Oil is Priced Globally

• The global oil trade is currently based in dollars. This means that US is the only country in the world that incurs no currency risk when it deals in the oil market. It is also the sole country that can print money to purchase oil. The dollar-based global oil trade gives the United States free reign to print dollars without sparking inflation – it allows the US to fund huge expenses on wars, military build-ups, and consumer spending, as well as cut taxes and run up huge trade deficits. Almost two-thirds of the world's currency reserves are kept in dollars, since oil importers pay in dollars and oil exporters tend to keep their reserves in dollars. This effectively provides the U.S. economy with an interest-free loan, as these dollars can be invested back into the U.S. economy with zero currency risk. In the euro zone things are different. Europe would prefer to see payments for oil shift from the dollar to the euro, which effectively removes the currency risk like it does currently for the US. It would also increase the demand for the euro and thus help to raise its value. Moreover, since oil is such an important commodity in global trade, in terms of value, if the pricing of oil were to shift to the euro, it would have a strong symbolic implication. There are also very strong trade links between OPEC Member Countries and the Eurozone, with more than 45 % of total merchandise imports of OPEC coming from the countries within the Eurozone. In the Baltic region, Russia is a big net exporter of oil, which means that the Russian economy is poised to benefit from higher oil prices. A move by Russia, the world's second largest oil exporter, to price its oil in euros poses a potential downside risk to the dollar as it opens the door for other oil exporters to follow suit. If oil were not priced in dollars, countries have less of a need to hold dollar reserves and may rebalance their currency holdings. The effect of this rebalancing could lead to a sharp sell-off in the dollar as countries shift a portion of their dollar holdings into euros. Iran for example, the world's 5th largest oil exporter, has also debated a move into euros. After the war in Iraq, there has been growing debate in the United States' longtime ally Saudi Arabia on possibly switching as well - though its government has not come down firmly on one side or the other. All of this talk of change could also have a negative impact for the dollar down the road if these changes take place, even on a limited basis. The bottom line is that the current record highs in the price of oil will likely have a continued global impact, with long lasting repercussions for global economic recovery.

Courtesy: Forex Capital Markets