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

CURRENCIES

The dollar index extended its 3-week ascent to a 6-1/2 month high. The euro plunged to a 7-1/2 month low, while the dollar/yen continues to gyrate on either side of 90 yen, moderately above November’s 14-year low. Bullish factors for the dollar include (1) safehaven buying of dollars as “sovereign default fears” spread throughout Europe with the budget deficits of Portugal and Spain now joining Greece on concerns that the countries will struggle to finance their debt, which undermines confidence in the euro, and (2) comments from ECB President Trichet who said that the economic outlook is subject to “uncertainty,” which signals the ECB has no immediate plans to tighten monetary policy. Undercutting the dollar was the warning from Moody's Investors Service that the US government's Aaa bond rating will come  under pressure unless measures are taken to reduce budget deficits for the next decade.

Recent global developments have battered the euro as it slumped to a 7-1/2 month low against the dollar and has now lost over 9% of its value in the past two months. In addition to concerns that the European Union will have to bail out Greece, speculation that economic growth will lag behind the US and Japan and  that the Euro-Zone’s debt load won’t return to pre-crisis levels for at least five years are also weighing down the euro. According to UBS, investors have spurned European stocks in favor of equities  elsewhere for a record 19 straight weeks and drained a net $13 billion from the market. Unless confidence soon returns to the euro, investors may continue to diversify away from euro assets.

METALS

GOLD— Apr gold prices slid to a 3-month low which is a downward correction from the nearest-futures record high of $1,226.40 an ounce. Bearish factors include (1) the surge in the dollar index to a 6-1/2 month high, and (2) comments from Fed Chairman Bernanke that “substantial” slack in the US economy will keep inflation low. The main bullish factor for prices is strong demand for gold as a store of value as  the massive liquidity programs of global central banks may debase their respective currencies and fuel inflation. As of Jan 26, large specs held a large long position of 211,924. The Gold Council reported that with gold prices up 10% 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—Mar copper prices corrected further down to a 3-1/2 month low from their recent 17-1/2 month high. Bearish factors include (1) the jump in global copper inventories to a 6-yr high of 738,737 tons (+36% y/y), signaling adequate supply and slack demand, (2) China’s recent action to limit bank lending, which may curb copper demand, and (3) ICSG’s estimate of a 539,000 MT global copper surplus for 2010. Bullish  factors include (1) China’s manufacturing sector expanding at a record pace in Jan, along with the US Jan ISM manufacturing index expanding for the sixth straight month to its fastest pace in 5-1/3 yrs, signaling  strength in the global economy, and (2) the +11% m/m increase in Dec US building permits to their highest  level in 14-months. Large specs as of Jan 26 added to their 4-3/4 yr high large long position of 28,770.

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