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Choking Global Growth Before It Even Happens

Written by A Forex View From Afar on Friday, May 29, 2009

Most market participants agree that the global economy is recovering, but chances are that some are expecting a recovery that is too strong for the current circumstances.

As investors judge that the global economy is improving, more short positions are taken against the dollar and treasuries, while long positions are build in the commodity market. This has made commodities such as gold, oil and copper enter into a real bull market.

However, TheLFB-Forex.com Trade Desk has stated over the last period, that the strong rise in crude oil threatens to dampen the economic recovery even before it happens. Oil is known to have a strong link with the world’s GDP, since in order for the global economy to develop, it needs an energy source. Unfortunately, oil is the only viable energy source available right now, despite its large list of detriments.

Academic studies have shown that a 10% increase in crude’s price can reduce the global output by 0.5%, by its direct effect on inflation, consumption and unemployment. During the December to February period, crude oil prices averaged $45 a barrel, while in March and April, the average price rose to around $50 per barrel. The gains seen in the crude oil market over the two periods dampened the global output by around 0.5%, since crude oil’s prices rose a little more than 10%.

However, nowadays crude oil is trading at $65 per barrel, which represents a 45% gain from the December-February period, and a 30% gain from the March to April episode. Translated, it would mean that if crude oil averages $65 a barrel in the coming months, as it trades right now, the world GDP will be slowed by full percentage points over the next few quarters.

This does not look to good, since the latest forecasts of the International Monetary Funds point out that the global economy will contract 1.3% in 2009, while it slowly recovers by 2010. Strong gains in the crude oil market, or strong volatility, have the potential to further delay the recovery period, or in an extreme case, crude oil can send the global economy back to the contraction phase.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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