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

CURRENCIES

The 8-month descent of the dollar continued with the dollar index falling to a 15-month low. The euro is moving just below its recent 15-month high, while the dollar/yen continues to consolidate on either side of 90 yen, modestly above its recent 9-1/2 month low. Bearish factors for the dollar include (1) the prediction from BNP Paribas SA that the dollar may extend declines as recent Fed-speak is "dovish" and shows that policy makers are concerned that unemployment will continue rising, and (2) the comment from the IMF that the dollar is still overvalued and that record low interest rates are continuing to fund global “carry-trades.” Supporting the dollar is the prediction from Barclays Plc that the dollar’s declining share of global currency reserves is a result of valuation rather than attempts by central banks to diversify holdings because central banks will not sell their dollar assets while the dollar is declining.

Speculation is mounting that as the Chinese economy strengthens, the PBOC may let the yuan appreciate. Oct China industrial production rose +16.1% y/y, its fastest pace in 18 months and Oct China retail sales rose +16.2% y/y. The PBOC then changed its rhetoric from policy makers will keep the yuan “basically  stable,” to policy makers will improve the setting of the yuan’s rate in a “proactive, controlled and gradual  manner and based on international capital flows and movements in major currencies.” With the upcoming  APEC Summit Nov 14-15 and President Obama’s trip to Beijing Nov 16-17, the PBOC may be signaling a  “gradual” shift toward a stronger yuan.

METALS

GOLD—The rally in gold prices continues unabated as Dec gold rose to a record high of $1,123.40 an ounce. Bullish factors include (1) the slump in the dollar index to a 15-month low, (2) the recent purchase by India’s central bank of 200 MT tons of gold, and (3) demand for gold as a store of value as the massive liquidity programs by global central banks may debase their respective currencies and fuel inflation. A bearish factor is scant inflation pressures after the July CPI fell -2.1% y/y, the biggest y/y decline since 1950. As of Nov 3, large specs held a large long position of 241,319. 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 is consolidating just below last month’s 1-yr high. Bullish factors include (1) the +16.1% y/y jump in Oct China industrial production, the biggest increase in 1-1/2 yrs, along with the US Oct ISM manufacturing index expanding at its fastest pace in 3-1/2 yrs, signaling strength in the global economy, and (2) a possible disruption to global copper supplies from labor unrest in South America. Bearish factors include (1) the -34% m/m plunge in Oct China copper imports, (2) the recent jumps in  Shanghai copper inventories to a 5-1/2 yr high and LME copper inventories to a 6-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 Nov 3 held a small long position of 9,062.

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