Currencies and Metals Outlook- An Excerpt from CRB'S Futures Market Service

CURRENCIES

The dollar index extended its 7-month long slump to a 14-month low. The euro pushed up to a 14-month high, while the dollar/yen corrected up to a 1-month high from its recent 9-month low. Bearish factors for the dollar include (1) the rally in the S&P 500 Index to a 1-year high, which boosted optimism that the global economic recovery is gathering steam and reduced demand for dollars as investors flock into higher-yielding currencies, and (2) comments from Japanese Finance Minister Fujii who said that he is reluctant to intervene in the foreign-exchange markets to halt the yen’s gains. A bullish factor for the dollar was the comments from World Bank President Zoellick that the dollar is likely to remain the world's dominant reserve currency as recent dollar weakness can be attributed to a reversal of the appreciation of the dollar when investors sought a safe haven at the height of the financial crisis.

Recent commentary from various Chinese government officials hint that they may allow a strengthening of the yuan. Chinese Vice Premier Li Keqiang said that the Chinese economy is moving in a positive direction and growth is rebounding month to month, while Vice Governor Ma Delun said inflation pressures are building and policy makers need to rein in the effects of extra liquidity on asset and consumer prices. China’s yuan forwards, or agreements to buy and sell assets at current prices for delivery at a specified time and date, recently rose to a 14-1/2 month high of 6.5440 yuan to the dollar. With Q3 GDP of 8.9% y/y, policy makers may allow these renewed gains in the yuan to keep inflation in check.

METALS

GOLD— Dec gold prices are consolidating just below their recent record high of $1,072.00 an ounce. Bullish factors include (1) the slump in the dollar index to a 14-month low, and (2) strong demand for gold as a store of value because continued massive liquidity programs by global central banks may debase their respective currencies and fuel future inflation. Bearish factors include (1) scant inflation pressures after the July CPI fell -2.1% y/y, the biggest annual decline since 1950, and (2) possible long liquidation pressures as large specs held a record large long position of 253,955 as of Oct 13. The Gold Council reported that global gold demand remained strong in Q2 led by an overall +46% y/y rise in Q2 gold demand to 222 MT, Q2 jewelry consumption fell -22% y/y, Q1 industrial demand fell -21% y/y, and Q2 gold supply rose +14% y/y to 927 MT.

COPPER—Dec copper prices surged to a 1-year high. Bullish factors include (1) labor unrest that may threaten global copper supplies as copper workers strike in Chile and Peru, (2) the increase in Sep US industrial production for the third straight month, and (3) the +23% m/m increase in Sep China copper imports, the first increase in 3 months. Bearish factors include (1) comments from the CEO of Rio Tinto Group that copper demand in the US and Europe has yet to recover, (2) the recent jumps in Shanghai copper inventories to a 5-1/2 yr high and LME copper inventories to a 5-month high, signaling slack demand and adequate supply, and (3) ICSG’s prediction of a 368,000 metric ton global copper surplus this year and a 539,000 ton surplus in 2010 as copper consumption slows. Large specs as of Oct 13 reduced their small short position to 1,829.

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