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

CURRENCIES

Dollar weakness persisted in the past week with the dollar index tumbling to a 15-month low. The euro is consolidating near $1.50, just under its recent 15-month high, while the dollar/yen fell to a 5-week low, a shade above its recent 9-3/4 month low. Bearish factors for the dollar include (1) dovish comments from St. Louis Fed President Bullard that past experience suggests the Fed may not start raising interest rates until 2012, and (2) weak demand for dollars after the 6-month dollar Libor rate fell below the equivalent 6- month yen rate for the first time since 1993. Bullish factors include (1) an increase in foreign demand for  dollar assets as Sep US longterm TIC flows rose more than expected, and (2) the recommendation from the chief economist at Nomura Securities that the Japanese government should combat deflation by selling the yen and weakening the currency.

Deflation concerns are growing in Japan after Japan’s Q3 domestic demand deflator, a measure of price levels that excludes the cost of imports, fell -2.6% y/y, the biggest decline since 1958. The Nikkei Telecom recently reported that the Japanese government may declare that the nation is in deflation, which would pressure the BOJ to keep interest rates near zero. Japan’s policy rate stands currently stands at 0.10%. The yen’s 6% gain against the dollar in the past three months has exacerbated deflation concerns by  making imports cheaper. Should deflationary forces accelerate, the yen may weaken if the Japanese government attempts to curb deflation by increasing deficit spending or selling yen in the currency market.

METALS

GOLD— The bull market in gold prices continues as Dec gold climbed to a record high of $1,153.40 an ounce. Bullish factors include (1) the fall 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 Oct CPI fell -0.2% y/y, its eighth straight monthly y/y  decline. As of Nov 9, large specs held a large long position of 238,060. The Gold Council reported that with  gold prices 10% higher in Q3 vs the year-earlier, gold demand weakened -34% y/y in Q3 to 800 MT, Q3  jewelry consumption fell -30% y/y, Q3 industrial demand fell -11% y/y, and Q3 gold supply fell -5% y/y to 833 MT.

COPPER—Dec copper jumped to a 13-3/4 month high. Bullish factors include (1) persistent dollar weakness, and (2) 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. Bearish factors include (1) the unexpected drop in Oct US housing starts and building permits, (2) the -34% m/m plunge in Oct China copper imports, (3) the recent jumps in Shanghai copper inventories to a 5-1/2 yr high and LME copper inventories to a 6- 1/2 month high, signaling slack demand and adequate supply, and (4) 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 9 held a small long position of 7,562.

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