Commodity markets has been recording strong gains recently driven to a large extent by the expectation that the US Federal Reserve will embark on another round of quantitative easing. But the focus is shifting towards the falling dollar. Here’s the latest analysis from Danish Saxo Bank.
“Without continued dollar weakness the rally will be running into trouble.”
Ole S. Hansen
The dollar has lost ten percent versus the euro and now trades at a 15-year low versus the yen. “Technical the uptrend is firmly established, however the failure of the dollar in making further progress last week led to a sharp 40 dollar reversal in prices. This indicates that the market is currently overbought and that some consolidation is now required before the next attempt higher,” analyst Ole S. Hansen at the Danish online bank, Saxo Bank, writes in his latest analysis.
The Reuters Jefferies CRB index returned 4.8 percent this past month with volatility continuing at elevated levels as seen below with large differences in performance, Mr. Hansen starts.
Money managers have recently returned to commodities. The combined speculative long positions on U.S. exchanges are at a record high, especially driven by increased positions in grain and metals. The net energy position is negative due to a large short position in natural gas.
Gold continues to make all the headlines with interested buyers counting anyone from central banks to retail investors. Silver has never the less been the star performer having outperformed gold by 14 percent during this recent rally. Being called the poor man’s gold it tends to outperform during extended rallies like the one seen recently. On that basis it is also likely to sell off harder once profit taking sets in which we experienced towards the end of the week.
Most researchers and commentators agree that metal prices will continue to rally going into 2011 as the fundamentals behind the current move will stay with us for a long period of time. Sovereign indebtedness combined with an exceptional amount of stimulus will ensure official rates staying low for a prolonged period removing the opportunity cost of holding metals. The fear of a weaker dollar in the months ahead however continues to be the main driver.
Investors based in Euros and other currently strong currencies like CHF and AUD will be surprised to see that their gold position has actually declined in value during September despite all the bullish headlines. This is a clear indication that without continued dollar weakness the rally will be running into trouble unless other factors like inflation fear or double dip recession emerges.
Technical the uptrend is firmly established, however the failure of the dollar in making further progress on Thursday led to a sharp 40 dollar reversal in prices. This indicates that the market is currently overbought and that some consolidation is now required before the next attempt higher. Saxo Banks yearend target of 1,350 has been met and currently it looks likely to be exceeded given the strength of the current rally. Technically the steep uptrend since July provides support at 1,290 before the previous high at 1,265. A move through the recent high at 1,365 would bring 1,400 into play.
The price of crude oil has rallied strongly recently finding support from a weaker dollar and of signs that US inventories have slowly begun to tighten while strong Chinese economic data also helped. The near month of November almost touched 85 dollars before profit taking on short dollar positions ahead of US employment rapport drove prices back towards 80 dollars.
The above mentioned three factors will continue to be the main drivers over the coming months. While we find it unlikely that the year high at 87.15 will be broken anytime soon it has to be accepted that a potential continuation of the weaker dollar theme could trigger such an event.
The speculative long position has now more than tripled since the lows back in August indicating that money managers have returned to the market albeit not in the same kind of size recorded when we breached 85 back in April. This reflects the trading behavior during 2010 where range trading has been the preferred trade. A move back below 80 would bring the middle of the year long range at 78 back into play.
Operators of very large crude carriers are still struggling as the supply of tankers currently outstrips the demand by nearly two to one. This has brought the cost of hiring a VLCC on the benchmark route from Saudi Arabia to Japan down to USD 2,500 per day from a 2010 peak of USD 70,000 back in June, and is well below operating cost.
Natural gas prices continues to suffer and for the second year running it is sitting at the bottom of the performance table having difficulties in getting any traction despite the ongoing rally in other products. The end of the hurricane season passed without any major incidents combined with ample supply and near term forecast of milder weather has driven prices to a year low at 3.60 dollar per mmBtu.
Recent price drops attracted renewed interest in buying natural gas through ETFs. The problem which is not that well addressed is the negative impact the forward price curve has on the performance of these. ETFs tend to track the near month natural gas contract and currently the price difference between November and the peak season contract of February is 18 percent. This leaves ETF investors a bit of mountain to climb in order to achieve any positive return on their investments.
Sugar rallied strongly this week after a recent round of profit taking as supplies from Brazil began to flow again. The renewed rally puts sugar up by 23 percent on the year and it comes amid concerns about potential limits on supplies from India, the world’s second largest producer and reduced production from Europe.
Wheat and especially corn prices have begun to move higher again after the sharp sell off recently that took the price of corn back to test important support at 4.50 per bushel. Ukraine, who was also hurt by the drought this summer, said they would impose export restrictions on wheat, barley and corn lasting until year end. The main focus on the week was the production report Friday from the USDA which added extra support to prices as they cut production and estimates for end of year stocks as adverse weather trimmed yields.
The supply and demand situation continues to favor corn over wheat in the coming weeks. US September wheat stocks showed the highest level in 23 years leaving the global balance in a comfortable situation. Just like other dollar based commodities the price development of the currency will be an important factor as a weaker dollar will help prices higher due to increased competitiveness on the international market.
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- Stocks of interest (news.theage.com.au)
- Currency wars are necessary if all else fails (telegraph.co.uk)
- Crude Oil Is Targeting $87, With All Signs Pointing Toward Inflation (businessinsider.com)