Crude oil price remains strong in European session. Currently trading at 80.4, traders are increasing long positions in the black gold on strong US economic outlook and Iranian tension.

Movement of crude oil price has been tracking that of EURUSD for most of the time in 2009. However, the correlation has broken down since mid-December as the budget deficit problem in Greece emerged. EURUSD tumbled while crude oil stayed at relatively high level ($70-80).

There are several factors causing the derailment. Worries about spread of sovereign crisis in Greece to other European countries trigger selloff in the euro. Recent economic data indicate that economic recovery in the 16-nation region is losing steam. On the contrary, US growth seems to remain on track. This has not only narrowed the interest rate differential between the US and the Eurozone, but also lifted oil price (the US is the world's largest oil consumer, economic recovery signals demand improvement in the energy market). While we do not believe current demand/supply balance in the oil market justifies crude oil price above 80, oil will unlikely catch up with euro's decline.

While oil's fundamentals will continue to improve in 2010, the biggest growth driver will remain in emerging markets, especially China. However, the wild factor is China's tightening measures as the government has shifted its focus to containing inflation from supporting growth this year.

In January and February, the People's Bank of China, with the aim of limiting lending, raised the required reserve ratio for commercial banks by a total of 100 bps. China's economy responded by showing slower growth.

Released earlier today, manufacturing PMI released by the government slid to 52 in February from 55.8 in the prior month. The reading was also lower than market expectation of 55.2. Similar survey compiled by HSBC showed a decline to 55.8 from 57.4. The reading indicates the government's measures are taking effect and economic growth may begin to stall.

The US will release ISM manufacturing index for February. The reading probably fell slightly to 57.9 from 58.4 in January. Both personal income and spending are expected to have risen +0.4% m/m in January. At the same time, construction spending should have contracted -0.5% m/m in January, moderated from -1.2% in December.

Gold trading remains range-bounded. While disruption in mine operation driven Chile's earthquake may lift oil price, resilience in USD limits gold's upside. Therefore, the yellow metal changes little from Friday's close at 1118.9.

Precious metals with greater industrial exposure perform better today. While silver edges +0.6% higher to 16.6, each of platinum and palladium extends Friday's gain by more than +1%.