Commodities managed to recover after an early onslaught of profit taking with gold heading for its first weekly gain since May. The ongoing battle between the bulls and the bears continued last week in crude oil with the bears seemingly winning the upper hand early on as August crude dropped heavily below $70 (Dh257) only to recover late in the week.
Once again the dollar took centre stage, weakening on the back of continued record low interest environment combined with the continued Chinese call for an alternative reserve currency.
The Organisition for Economic Co-operation and Development expects global output to decline by 4.1 per cent this year but at the same time indicated that growth would return to positive territory in 2010. A record government bond offering from the US Treasury went well while the European Central Bank flooded the banking system with €442 billion (Dh2.28 trillion) of one year money at a cheap rate of one per cent.
These factors all helped commodities as stock markets rallied and the dollar weakened. On top of this the unrest in Iran and Nigeria, combined with increased demand from China, helped crude recover above $70.
While Far Eastern demand is holding up, no signs of a US pickup has been seen yet. Petrol, which was the main driver of this recent sell-off, has seen another strong build in the weekly inventories.
The upcoming US Independence Day holiday weekend will be watched closely. Historically this is the high point of the US driving season but it has fallen victim to the recession.
Technically, August crude is trading inside a triangle formation and the current trading range is $66.50 to $72.
For now we expect this range to hold but will be watching the dollar closely. A break above would target the recent high of $73.90 followed ultimately by the 38.2 per cent retracement of the whole sell-off from the 2008 high at $76.80. Support below $66.50 can be found at $65 followed by the important $60 level.
We continue to believe that the move back above $70 is not supported by current fundamentals and that most of the buying seen over the past few days has been from disappointed short sellers who were forced to cut back positions as the weaker dollar drove prices higher.
Gold finally swung into action, falling heavily early in the week only to recover strongly helped by a weaker dollar and Chinese talk about additional buying. A senior researcher with the ruling Communist Party said on Thursday that China should buy more gold as a hedge against a falling dollar and to diverge more away from US Government bonds.
On a cautious note we saw the biggest drop in exchange-traded fund investments since April 17, which indicates investors have used the opportunity to reduce their exposure. Furthermore physical demand from the world's largest consumer, India, remains weak ahead of the annual festival and wedding season.
Technically, consolidation will probably prevail near term as resistance at $950 should hold while support is at $925 followed by $913. Things to look out for are the continued focus on the dollar, any change in inflation outlook and flows in and out of ETFs.
Sugar made a new three-year high during the week driven by worries about a poor monsoon in India. This is important for sugar as India is the world's largest producer and consumer.
October sugar in New York rallied 10 per cent before some profit taking emerged. On a pullback now, strong support should be found just below $17.
Finally, a look at the commodity rankings for 2009 RBOB petrol is still in a clear lead with an adjusted return of 71 per cent followed by HG copper at 63 per cent and natural gas at 36 per cent.
On copper, there is talk that the aggressive Chinese buying over the past few months is coming to an end could lead to lower prices near term.
- The author is Futures and Fixed Income Manager at Saxo Bank
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