Tag Archives: Commodities and Futures

Commodity Rally Continues Despite Correction Risk

While the credit market seems to have shifted focus, back to the US housing market, the commodity investors continues to rally on the expectations of a second round of quantitative easing from the US Federal Reserve, Saxo Bank analyst Ole Hansen writes in his weekly roundup. However, the commodity prices are not the only thing rising…

“The CRB index together with ten of the markets below has entered into overbought territory increasing the likelihood of a correction.”

Ole Hansen


So far the expected introduction of QE2 has hammered the dollar against other currencies raising fears that it could have a destabilizing effect on the global economy. The dollar has lost more than ten percent in value versus the euro in just one month with only one out of 45 global banks predicting such an aggressive weakening over such a short period of time, according to Saxo Bank.

The effect on commodity markets has been very visible as precious metals continues to rally to new record highs as a cocktail of higher future inflation expectations combined with a weaker dollar lends the support required to break up into new territory.

The Reuters Jefferies CRB index has rallied strongly this past month with only a few markets moving in the opposite direction, futures and fixed income manager Ole S. Hansen at Saxo Bank points out.

Several commodities from different sectors have shown double-digit returns.

“The CRB index together with ten of the markets below has entered into overbought territory increasing the likelihood of a correction. For now though the dollar holds the key to any near term movements,” Hansen writes.

“It is also worth noting the discrepancies in performance within sectors with the most noticeable being corn which has outperformed wheat by nearly 19 percent in just one month, more on that later,” he notes.

Gold and especially silver broke higher this week with silver having rallied eight weeks in a row, the best run since 2006.

Real interest rates, which are nominal interest rates minus inflation, moved lower as QE2 and a subsequent weaker dollar had the market increasing the future inflation expectations.

Both metals are now technically very overbought, just like the dollar is much oversold, but until we have further news from the US Federal Reserve there has been no incentive to reduce risk in this sector with gold bulls looking for 1,400 an ounce as long the dollar stays weak.

“Support is located at last week’s low at 1,325 followed by 1,300.”

The price of Crude oil has now settled into its new range between 80 and 85 dollars.

The strong rally from the 70 dollar low which was driven by the weakening dollar, strong Chinese demand and signs of a reduction in US storage levels came to a halt this week.

“Traders were unwilling to add to their already long positions before seeing further clarification about QE2 and the subsequent impact on the dollar,” the Danish analyst says.

OPEC ministers met this week and decided to keep production targets unchanged but at the same time urged member nations to comply with their quotas from December 2008.

Currently compliance averages around 60 percent, somewhat higher than recent readings but still well below acceptable levels with Nigeria and Angola the worst offenders.

“They see the world market as being well supplied and prices are at levels that are acceptable to producers as well as consumers,” Hansen notes.

“Money managers, such as hedge funds, nearly doubled their long position in WTI crude last week on the back of the recent move back above 80 dollars.”

On that basis a move back below 80 dollars now carries the risk of long liquidation as many are unwilling to carry unprofitable positions for long.

Likewise a move above 84.50 should ensure that momentum carries it towards 87.15, the April high.

Turning to agricultural the USDA delivered a major shock to the market last Friday when they sharply reduced their forecast for corn and soybean output.

Hot August weather was followed by heavy rains which reduced yields across the US Midwest.

“What followed on Monday was the biggest one day rally in corn since 1973 as it rallied to the maximum allowed limit of 8.5 percent just short of the psychological level of 6 dollars per bushel.”

The USDA forecast that by September 2011 the corn stockpile will shrink to less than four weeks supply at 900 million bushels, the lowest in 14 years.

This week the US Environmental Protection Agency added further pressure to the supply outlook as they raised the cap on the amount of ethanol blended into gasoline from ten to fifteen percent for cars less than four years old.

“The outlook for wheat, despite the lost output from Russia this summer, looks somewhat better and this has led to the near 19 percent difference in performance this past month,” Saxo Bank writes.

Chinese demand, especially for soybeans remain strong.

The recent dramatic rise of the price of corn could tempt US farmers to switch production away from soybeans thereby cutting supplies and boosting prices.

“Technically corn has found resistance towards USD 6 per bushel and technical traders would like to close the price gap between 528.25 and 554.5 that emerge when the market spiked higher last Friday.”

“Talk of a global food crisis still lingers given the strong price rises among agricultural products these past few months,” Ole S. Hansen writes.

 

Ole S. Hansen

 

The three S&P GSCI sub indicies covering food related products have rallied between 18 and 28 percent year to date primarily due to adverse weather in the growing regions combined with the economic pick up among emerging economies which has led to a change in consumer habits.

Meat analysts forecast higher prices for beef, pork and poultry as producers will be forced to pass on higher feeding cost as the supply of corn and barley tightens.

The US cattle herd is the smallest since 1973 and breeding hogs are near the lowest ever count.

One of the reasons behind this reduction is due to the price of main feed ingredient which is 70 percent above the 10 year average.

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Forex Update: A Mild Dollar Bounce

As predicted last weekend, it became a wild week in the Forex market – specially for the dollar. Here’s this weeks summary, presented by FX analyst Andrew Timothy Robinson at Saxo Bank.

“The question remains whether this is merely profit-taking/ scaling down of positions before tonight’s non-farm payrolls or the start of a more longer dollar bounce….”

Andrew Timothy Robinson


ECB’s Trichet had warned about excessive FX volatility while two FED members, Fisher and Hoenig, broke from the more recent dovish talk on QE II. The question remains whether this is merely profit-taking/ scaling down of positions before tonight’s non-farm payrolls or the start of a more longer dollar bounce….

The Bank of England stood pat on its QE target and, with the market overly committed to a second phase of QE, the pound rallied back above the key 1.60 level, albeit temporarily.

ECB also kept up its recent rhetoric about rates being appropriate, even if they are slightly accommodative, with inflation risks tilted slightly to the upside, growth outlook slightly to the downside.

As a result EUR pushed up to the 1.40 handle, taking out reported options barriers in the process.

After the strong jobs data, AUD crawled up to a record high of 0.9916 (is that close enough to parity for everyone?) before retreating as the dollar rebounded.

The BoJ gave the green light to those looking to push USDJPY to new lows as it commented that it would not look to weaken the JPY as a tool aimed at increasing Japanese competitiveness, but would only do so to stem “excessive” moves in the market. mere placatory comments ahead of the IMF/G7 meeting?

As a result USDJPY eased off to new 15-year lows.

On the data front, initial jobless claims were slightly better than expected, 445k versus 455k and an improvement from last week’s 456k though continuing claims edged higher to 4462k from 4457 last week.

Wall Street sagged as commodities eased off with the dollar’s rebound.

Not so much to excite Asia today with all eyes focused on the US non-farm payroll and unemployment report tonight and the IMF/G7 finance ministers’ meeting in Washington.

China markets re-opened after a one week break and the PBOC fixed the USDCNY rate at 6.6830 (a new low and some 0.27% lower than the previous fix, though note the USD index has fallen 1.6% in that period).

Japan’s Finance Minister Noda was on the wires again, commenting on the JPY’s gains and reminding markets that firm measures will be taken on excessive currency movements, including intervention, when necessary.

He also sought to justify the Sep. 15 intervention by saying it was intended to stop such moves  and not intended to be on a big scale nor with a specific target level in mind. He added that competitive currency devaluation would be bad for the global economy- placatory words indeed ahead of today’s meeting.

We might have had a flurry in risk appetite when Moody’s announced Friday mid-morning that it was putting China’s ratings on review for a possible upgrade, but sadly the reaction in currency markets was muted.

 

Andrew Robinson

 

For the rest of the day, Europe sees Swiss unemployment, German trade data, Swedish industrial production and UK PPI.

Prior to the US payroll data, we have Canada’s unemployment and housing starts while the BoC’s business outlook survey follows afterwards.

US wholesale inventories complete the data for today.

Have a great weekend!

By Andrew Timothy Robinson

FX-specialist, Market Strategist, Saxo Bank

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TO WATCH – UPCOMING WEEK

(All Times GMT)

  • GE Trade Data (0600)
  • Sweden Industrial Production (0730)
  • UK PPI Input/Output (0830)
  • CA Employment Change/Unemployment Rate (1100)
  • US Change in Non-farm Payrolls (1230)
  • US Unemployment Rate (1230)
  • US Avg. Earnings (1230)
  • US Wholesale Inventories (1400)
  • CA BoC Business Outlook (1430)

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Why Gold & Silver Prices Will Continue to Explode Higher

The price of gold reached a new record high Thursday at 1354 dollar per ounce, silver touched a new all time high at 23,5 dollar an ounce.

J.S. Kim at SmartknowledgeU.com on why gold/silver prices will explode higher in 2011 and coming years, and the fraudulent nature of the global monetary system:

Market Snap Shots

Gold: Slightly down after the new record, however, RSI is still tending up.

Here’s the last six week’s chart:

And here’s the last 48 hours:

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SILVER: Seem to follow the gold price pattern. However, the last six week’s chart show – as opposite of gold –  a slightly downward tending RSI.

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