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

DOLLAR

The dollar index is consolidating moderately above last month’s 4-1/2 month low.  The euro is moving sideways while the yen us holding precariously below its recent 15-year high against the dollar.  Bearish factors for the dollar include (1) comments from ECB President Trichet who said that a double-dip recession in the Euro-Zone is “not in the cards,” along with the ECB’s action to raise its 2010 GDP estimate for the Euro-Zone to 1.4%-1.8%, up from a previous forecast of 0.7%-1.3%, (2) comments from Chinese Premier Jiabao that boosted the euro when he said China and western countries should work together to enhance the world's confidence in the euro and the EU economy, and (3) the action by Bank of America Merrill Lynch to hike its year-end forecast for the yen to 81 to the dollar from a previous forecast of 90, citing expectations the Fed will increase monetary easing to preserve the US economic recovery.  Bullish factors include (1) the Aug 10 FOMC meeting minutes in which policy makers signaled no plans to resume large-scale asset purchases, and (2) the smaller-than-expected downward revision in Q2 US GDP to +1.4% from +2.4%.

Fundamental Outlook—Medium-term bearish—The dollar has stabilized and is trading sideways towards the lower end of its sharp June-July sell-off.  The dollar continues to be driven mainly by the extent of safe-haven demand, which recent perked up with the sell-off in stocks in August.  However, if the stock market can continue the 2-day rally seen so far in September, then dollar weakness is likely to reemerge.  The dollar continues to be undercut by the Fed’s much more expansive monetary policy than the ECB, negative dollar interest rate differentials versus the euro, and the widening of the US trade deficit this year.

GOLD

Gold prices extended their 5-week upmove to a 2-month high and are just below June’s record high of $1264.80 an ounce.  Bullish factors include (1) increased fund buying of gold after ETF holdings of gold rose to a record 2,079.48 metric tons as of Sep 1, (2) the slide in the dollar index to a 2-week low, and (3) comments from Fed Chairman Bernanke that the Fed "will do all that it can" to ensure a recovery, which may lead to further quantitative easing and boost demand for gold as an inflation hedge.  Undercutting gold prices is the threat of  hedge fund long liquidation and overall liquidation of commodities by investors to move into cash on increased risk aversion.

Fundamental Outlook - Near-term Neutral - Gold is trading near the top of its 3-month correction range and will turn bullish if prices decisively breakout above the record high.  Gold continues to see support as global equities falter and on expectations that central banks will be too slow to remove excess liquidity, posing an inflation threat over the long-term.  On a short-term basis, gold is still seeing overhead pressure from disinflation, slowing global growth, and possible fund liquidation.

COPPER

Copper prices climbed to a 4-month high and are moderately below April’s 2-year high. Bullish factors for  copper prices include (1) the unexpected increase in the Aug ISM manufacturing index along with the larger-than expected increase in China’s Aug manufacturing growth, (2) the report from Japan's Copper  and Brass Association that Japan's July copper-alloy product output rose +21.4% y/y, its ninth straight  monthly increase and a sign of steady demand, and (3) the steady decline over the past 6 months in LME  copper inventories to a 9-1/2 month low. Limiting gains in copper prices was Morgan Stanley’s cut its  second-half GDP estimate for the US to 2.0%-2.5% from an earlier estimate of 3.0%- 3.5%, which suggests  slower consumption of industrial metals.

Fundamental Outlook—Bull Market Correction—Copper prices are approaching the 2-year high posted in April. Demand concerns are limiting price gains, but the  long-term picture for copper remains bullish on reduced supplies and on optimism that strong global  industrial demand will reemerge when the global economy regains its balance.

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