Dollar to stay weak for months

A weaker US dollar and equity markets still on a sell mode provided a boost to gold prices this week, with August gold rallying to $950, a one-month high. We believe the US strength witnessed on Thursday after European Central Bank President Jean-Claude Trichet's comments was a knee-jerk reaction. We expect the US dollar to stay weak in the coming months and subsequently the 1.60 level against euro to go. We therefore maintain our bullish outlook for gold and a retest of the $1000 level in the coming weeks.

More short term as long as August gold stays above $923, we are looking for it to test the $953 area and subsequently $967 for next week as target.

A miners' strike in Peru, the world's second largest copper producer, and a weaker dollar contributed to a strong rally in copper prices this week. However copper prices have retreated since then possibly feeling the effects of weaker global equity markets. To our view copper prices remain susceptible to further price spikes. Inventory should remain low into 2009 but further gains will be linked to global growth. Although China demand looks strong we could see some abrupt adjustment. September copper (hgu8) support is at 386 area and as long as the bull channel is not broken the 422 target is still valid.

Energy

Statistics released by Department of Energy in the US contrasted a tightened picture in crude oil with build in product balances. Crude stocks drew two million barrels (bbls) versus consensus of a 500,000 bbls build; petrol built 2.1m bbls, versus consensus of a 500,000 bbl build; and distillate built 1.3m bbls, more or less in line with the consensus estimate of a 1.5m bbls build. Interesting to note that the consensus included only nine estimates this week. The crude draw was due to higher runs and lower imports, so we do not see it as bullish. Still, crude oil closed up at a record high at $145.85 on a weak dollar and more insistent reports of a possible strike on Iran nuclear facilities in the coming months. The latter has helped to revive the bullish sentiment.

A striking point on Friday was the no price reaction from oil although euro/dollar was losing two figures. It gives a good insight in the market psychology and further potential gains.

On August WTI crude, we still have a neutral stance, however, with a bias on selling rallies at this level. Crude reached resistance around $946 area, if it has to go a projection line, it is giving us $151.70 as next target. Supports at $143.90 and $142.60 and then $140.60.

Natural Gas

We see the $17/20 price for October natural gas as a strong possibility given the current level of crude oil prices. We would view this as easily achievable if the US summer is hotter than normal and the western Atlantic delivers an active hurricane season.

Agriculturals

We believe the sell-off we have witnessed in March was just a correction in a longer term bull run. CFTC figures were showing aggressive long positions and therefore grains were most vulnerable to profit-taking. However, on the long term, we do not see significant changes in the bullish fundamental in grains. Bear in mind that the inventory level across the crops remains around the lowest point since the early 1970s and therefore we maintain our bullish outlook on grains and recommend new investors to buy on dips. The torrential rains in the US Midwest have sent corn prices to new highs, given the sharp rally in corn over the past month (+33 per cent) we would not be surprised to see another consolidation. The last week after trading close to $8.00, some profit-taking occurred. December corn is still trading in the same range $7.50-$7.95 for the last three weeks. Concerns about a potentially damaging heat wave in the US corn belt dissolved concerns about the state of the crop and it should provide support throughout the summer.

The door is wide opened for wheat to benefit from the less than optimal weather in Australia. The December contract is still our favourite on the medium term. Also technically, the 880 area has proved to be a good support and we should see a retest of the 945-965 area in the coming days.Some profit-taking is also due in cocoa and coffee.

- The author is a market strategist at Saxo Bank