Currencies and Metals Outlook- An Excerpt from CRB'S Futures Market ServiceDOLLAR
DOLLAR
The dollar index fell to a 2-1/2 month low and may be headed for a test of November's 13-month low. The euro posted a 2-month high, while the dollar/yen weakened to a 2-week low after S&P downgraded Japan's sovereign credit rating. Bearish factors for the dollar include (1) euro strength after the unexpected increase in the Jan German IFO business climate to its highest level since records for a reunified Germany began in 1991, (2) stronger interest rate differentials euros after the 3-month Euribor rate rose to a 1-1/2 year high of 1.057%, and (3) an increase in European inflation concerns after Dec German import prices rose to a 29-year high of +12.0% y/y. Bullish factors for the dollar include (1) weakness in the yen after S&P cut Japan's credit rating one step to AA- with a stable outlook, saying the government lacks a "coherent strategy" to address a 943 trillion yen ($11 trillion) debt burden, the world's largest, and (2) the warning from Fitch Ratings that there is a continuing risk that Euro-Zone nations will have their credit ratings downgraded until fiscal consolidation is secured and the economic recovery is broad-based.
Fundamental Outlook-Bear Market Correction -The dollar index remains weak as it tests the lower end of its 2-3/4 month consolidation range. Losses remain limited due to the dollar-bullish factors of the European sovereign-debt risks, improved US economic data, and higher T-note yields. However, the dollar's long-term bearish factors are likely to eventually reemerge and cause a resumption of the bear market due to the Fed's far more expansive monetary policy than the ECB, negative short-term dollar interest rate differentials versus the euro, the intractable U.S. current account deficit, and reduced demand for safe-haven dollars as the global economy slowly improves.
Gold prices corrected down to a 3-1/2 month low from last month's record high of $1431.10 (nearest-futures Dec contract). Bearish factors include (1) hedge-fund liquidation after assets in gold-backed ETPs fell to a 5-1/2 month low as of Jan 26, (2) slack inflation pressures with the Q3 core PCE deflator falling to +0.5% q/q, the lowest figure since data began in 1959, and (2) speculation that an economic recovery will curb safe-haven demand for gold. Bullish factors include (1) continued strong demand for gold as a currency substitute and as an inflation hedge with quantitative easing programs in the US, UK and Japan, and (2) underlying safe-haven demand due to the European sovereign-debt crisis.
Fundamental Outlook - Bull market correction - Gold prices are correcting lower as hedge-funds liquidate record long positions and safe-haven demand for gold is reduced with the stronger US economy. However, the long-term picture remains bullish for gold with market uncertainty about whether the Fed and the ECB will start withdrawing liquidity before there is an inflation outbreak.
Copper prices corrected further to a 1-month low from their recent all-time high of $4.4615 a pound (nearest-futures Jan contract). Bearish factors include (1) the -1.6% y/y decline in the Nov US CaseShiller U.S. home price index, the biggest year-over-year decline in 11 months and a sign of continued weakness in US housing, (2) concern that Chinese demand may fall as the PBOC raises interest rates further this year, and (3) the ongoing buildup in global copper inventories as LME copper inventories climbed to a 4-1/2 month high and Shanghai copper stockpiles are near a 7-month high. Bullish factors include (1) the +17.5% m/m jump in Dec US new home sales to an 8-month high, (2) strong Dec manufacturing data from China and the US, the world's biggest copper users, and (3) ICSG data showing the global copper market had a 83,000 metric ton deficit in Sep and a 436,000 ton deficit during Jan-Sep.
Fundamental Outlook-Bull market correction -Copper prices are correcting from their recent record high. The lingering European debt crisis and actions by China to slow inflation may temporarily slow copper price gains, but the long-term picture for copper remains bullish on tight supplies and on optimism that global industrial metal demand will strengthen as the global economy gains traction.
