CURRENCIES

The dollar index has been moving sideways the past month moderately above its recent 6-1/4 month low. The euro is fluctuating on either side of $1.40, modestly below its recent 5-3/4 month high, and the dollar/yen is consolidating between March’s 4-month low and April’s 8-month high. Bearish factors for the dollar include (1) euro supportive comments from ECB Council member Weber who said the ECB has used up its room to cut interest rates and “additional steps are not necessary at the moment,” and (2) the prediction from Standard Chartered Plc that the dollar will weaken to $1.55 per euro as the Fed signaled it  will keep interest rates low for an indefinite period, prompting investors to sell the dollar for higher-yielding assets. Bullish factors include (1) the statement from Moody’s Investors Service that the world has “no credible alternative” to the dollar as the world’s reserve currency, and (2) a flight-to-safety into the dollar after the World Bank cut its global growth forecasts for this year and next. 

Recent foreign-exchange volatility is confounding exporters as they try to protect overseas earnings. The President of Barclays Plc recently said that “currency volatility is running at more than double the norm,” and according to the JPMorgan Chase G7 Volatility Index, price fluctuations among G7 currencies in May were the highest since October when they hit a 16-year high. The volatility is being fueled by uncertainties over the sustainability of a global economic recovery, Fed policy, the future of the dollar as a world reserve currency, and the US government’s record budget deficit.

METALS

GOLD—Aug gold prices slipped to a 1-1/2 month low. Bearish factors include (1) a lack of inflation after the May US CPI fell -1.3% y/y, the biggest annual decline since 1950, and (2) reduced safe-haven demand for gold as global equity markets stabilize. Bullish factors include (1) the recent 6-1/4 month low in the dollar index, (2) strong demand for gold as a store of value as continued massive liquidity programs by global central banks may fuel future inflation, and (3) stagnant gold mine production since 1998. Large specs held a large long position of 175,543 as of Jun 16. The Gold Council reported that a 248% surge in Q1  investment demand led to an overall +38% y/y rise in Q1 gold demand to 1,016 MT, Q1 jewelry consumption fell -24% y/y, Q1 industrial demand fell -31% y/y, and Q1 gold supply rose +34% y/y to 1,144 MT.

COPPER—July copper prices corrected further down to a 1-month low from their recent 8-1/4 month high. Bearish factors include (1) the plunge in US May capacity utilization to an all-time low (data since 1967), (2) ICSG’s prediction of a 345,000 metric ton global copper surplus this year and a 400,000 ton surplus in 2010 as the global recession causes a “significant” drop in copper use, and (3) the plunge in Apr US housing starts and building permits to all-time lows (records since 1959). Bullish factors include (1) the 6% jump in May Chinese copper imports to a record 422,666 tons, (2) the 50% plunge in LME copper inventories to a 7-1/2 month low from a 5-1/2 yr high in Feb, and (3) Fed Chairman Bernanke’s comments that the US housing market is showing “signs of bottoming.” Large specs as of Jun 16 held a large short position of 18,464.

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