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

CURRENCIES

The dollar index corrected down to a 1-1/2 month low from last month’s 9-month high. The euro recovered to a 1-1/4 month high from its recent 10-month low and the dollar/yen is consolidating on either side of 90 yen, modestly above November’s 14-year low. Bearish factors for the dollar include (1) the smaller-than-expected increase in the Jan net long-term TIC flows, which indicates weakened international demand for US dollar assets, and (2) the action by S&P to remove Greece from its “credit watch negative,” meaning it is no longer considering a downgrade of Greece’s debt. Bullish factors include (1) the action by the BOJ to double its 3-month loan facility lending program to 20 trillion yen ($222 billion), which increases the BOJ’s quantitative easing program and weakens the yen, and (2) the statement from Moody’s Investors Service that the US is unlikely to lose its top Aaa credit rating.

The Fed in its most recent post-FOMC communiqué repeated the pledge to keep the funds rate “exceptionally low” for an “extended period.” This signals that Fed members are still unconvinced in the sustainability of the economic recovery. The Fed has repeated the “extended period” language at each policy meeting since March 2009 and Chicago Fed President Charles Evans has commented that the phrase means to him 3 or 4 FOMC meetings. This indicates the Fed is on hold until at least the end of this year, and along with the recent affirmation of Greece’s sovereign credit ratings by S&P, has removed another bullish factor for the dollar. Thus, the recent 9-month high in the dollar index may stand as a near-term top.

METALS

GOLD— Apr gold prices continue to oscillate within a 4-month $180 range, moderately below the all-time nearest-futures high of $1,226.40 an ounce. Bullish factors include (1) the slump in the dollar index to a 1-1/2 month low, and (2) 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. Undercutting gold prices was the +1.3% y/y increase in Feb core CPI, the smallest gain in 6 years. As of Mar 9, large specs added to their large long position of 208,194. The Gold Council reported that with gold prices up 38% in Q4 vs the year-earlier, gold demand fell -24% y/y in Q4 to 819.7 MT, Q4 jewelry consumption fell -8% y/y, Q4 industrial demand rose +11% y/y, and Q4 gold supply fell -8% y/y to 898 MT.

COPPER—May copper prices are consolidating mildly below January’s 1-1/2 yr high. Bullish factors include (1) the drop in the dollar index to a 1-1/2 month low, (2) the +10% m/m increase in Feb China copper imports, and (3) China’s manufacturing sector expanding for the 12th straight month in Feb and the US manufacturing sector expanding for a seventh straight month in Feb, signaling strength in the global economy. Bearish factors include (1) the report from the WBMS that the global copper market ended 2009 in surplus by 209,300 MT, signaling adequate supply and slack demand, (2) the -11.2% plunge in Jan US new home sales to a record low 309,000, and (3) ICSG’s estimate of a 539,000 MT global copper surplus for 2010. Large specs as of Mar 9 added to their moderate long position of 18,278.

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