Dollar returns to the driving seat

China once again showed its importance as another attempt to rein in lending led to selling of commodities and a switch to perceived safety of government bonds and the dollar.

Commodity prices fell to their lowest levels this year as China took fresh measures to cool its galloping growth. Banks were temporarily told to halt lending in an attempt to reduce the frantic levels of activity during the first few weeks of 2010. Given China's and other emerging economies importance in driving commodity prices, this move had an adverse impact on markets from oil to metals.

The CRB commodity index, which one week into January trading showed a gain of four per cent, have since then been struggling and this week moved back to levels last seen in December 2009 and thereby putting a lot of new established long positions under pressure.

Technically, the uptrend since March 2009 is in danger of being broken so the next few days will be important in deciding the near-term direction of commodities.

Another piece of bad news has been the renewed strength of the dollar, especially against the euro, which fell to a five-month low this week over continued concerns about Greece's fiscal problems.

The speculative positions recently have been heavily favouring a weaker dollar and this turnaround has forced a lot of selling in order to limit losses.

Stock markets could be the next focus point as Presidents Barack Obama's proposed overhaul of the banking sector saw equity markets falling through previous support levels. Five failed attempts to crack the $1,150 resistance level on the S&P 500 index was followed by a drop through previous support
at $1,130. This has now opening up for a potential move back towards $1,085.

Crude oil for March delivery reached a low at $75.6, a 10.50 per cent drop from the recent highs.

On top of the factors already mentioned, the speculative long position in crude had reached a new record high, leaving the market exposed to stop loss selling, while Opec's compliance in adhering to agreed production cuts continue to slip.

Adding all these up energy prices had to come lower but considering the amount of unfriendly news prices have held up pretty well.

Continued range trading around $80 seems to be the most likely trading pattern going forward.

For now though it is pretty clear that commodity markets are not ready to decouple from the dollar and the moves there has to be watched closely.

Technically, near month crude is in a wide $73 to $88 upward sloping channel and the month-long uptrend is still intact. Additional support can be found at $75.25 being the 100-day moving average while resistance is located at $77.80 followed by $80.70.

Platinum raced to a 12 per cent gain this week before selling drove it lower from overbought levels.

The dramatic rise seen so far has been due to the January 8 successful launch of a Platinum ETF. To keep up with demand this fund bought 195,000 ounces of platinum during a 10-day period, more than 10 times daily global production.

Platinum is primarily used in jewellery and catalytic converters in cars and China has again been mentioned as a reason for buying it given the forecast for 17.2 million new cars on the road this year.

Look for support on the April contract at $1,515 to hold for now.

The gold market also got caught by resurgence of the dollar dropping back towards the December lows at $1,075. Support was found at 100-day moving average at $1,086 ahead of $1,075 and the crucial trend line support at $1,060.

The bull market for gold is still intact and the fundamental factors that have been driving gold are still there but for now the dollar is in the driving seat so we have to advise caution on gold for the next few weeks.

Relative value trades such as gold/silver or gold/platinum ratio trades should perform pretty well during this correction. 


- The author is Senior Manager for CFD and Listed Products with
Saxo Bank