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

CURRENCIES

The dollar index corrected up to a 2-1/2 week high from its recent 14-month low. The euro corrected down to a 2-1/2 week low from its 14-month high, while the dollar/yen corrected up to a 5-week high from its recent 9-month low. Bullish factors for the dollar include (1) an increase in the safe-haven demand for dollars as global equity markets stumbled, and (2) comments from former ECB President Issing who said that budget deficits in the Euro-Zone will be a “big, big problem” for the euro as the global recession ends. Bearish factors include (1) the report from China’s Financial News that said China should boost the amounts of yen and euros in its foreign-exchange reserves at the expense of the dollar, and (2) the prediction from Commerzbank AG that the dollar will remain under pressure “due to the low interest rates and the resulting attractiveness of the dollar as a financing currency for carry trades.”

One of the consequences of the weakened dollar has been the proliferation of carry trades financed by the dollar. In a carry trade, investors borrow in countries with low interest rates to invest in higher-yielding assets. Investors worldwide are borrowing dollars to buy assets including equities and commodities, sending prices of some assets beyond fundamental justification. NYU professor Nouriel Roubini says that the dollar carry trades are fueling “huge” bubbles that may spark another financial crisis. Roubini predicts that the dollar will eventually “bottom out” as the Fed raises rates and withdraws stimulus measures, which will force investors to reverse their dollar carry trades and “rush to the exit.”

METALS

GOLD— Dec gold prices corrected down to a 3-week low from their recent record high of $1,072.00 an ounce. Bearish factors include (1) a slight recovery in the dollar, and (2) scant inflation pressures after the July CPI fell -2.1% y/y, the biggest annual decline since 1950. Bullish factors include (1) the recent 14-month low in the dollar, 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. As of Oct 20, large specs cut their large long position to 250,107. 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 fell back from its recent 1-year high. Bearish factors include (1) the unexpected decline in Sep US new home sales, (2) the recent jumps in Shanghai copper inventories to a 5-1/2 yr high and LME copper inventories to a 5-1/2 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. 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 +29% m/m increase in Sep China copper imports, the first increase in 3 months. Large specs as of Oct 20 reversed to a now small long position of 1,685 for the first time in the last 15 months.

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