The US Federal Reserve handed energy investors a surprise increase of the discount rate from .5% to .75% late Thursday afternoon. Trader's immediate reaction was to do what they are trained to do when a surprise action by the Fed occurs and that is to close out positions and try to digest the meaning of the move at a later time. Well, it did not take long for traders to discern what to do next. Upon open of the NYMEX pit session traders were immediately hitting the bids pushing gas, distillate and crude futures into positive territory after the first hour of trading. The big question is; will the buying continue in next week's trading sessions?
The key to watch for next week is will sovereign funds, who have been selling the US dollar for the past year and diversifying into euros, gold and who knows what else, begin panicking that the US dollar is going to continue moving higher and convert back the US dollars pushing the US dollar even higher.
China could be the leader in this conversion back to US dollars as they have been buying less US treasuries in favor of commodities and other currencies. If China begins panic buying, other sovereigns will follow. The likely event is the buying will push the Euro versus US Dollar spot price down to $1.30 within a few weeks and eventually to $1.20.
As the US dollar buying continues, commodities will likely sell off. Energy traders will do well to look for shorting opportunities this week as crude pops its head above the $80 level.
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