Dollar marches on, commodities take a breather

(Ole Hansen)

The euro fell to a new low for 2010 before a relief rally lifted prices as hopes of a political solution to the debt problem of Greece emerged.

Before this agreement among euro zone leaders the Dollar Index, which comprises a basket of six major currencies versus the dollar, rose to a 10-month high, primarily driven by new lows on the euro.

Not helping the situation was news that Fitch, the rating agency, had downgraded Portugal's sovereign credit rating one notch to AA-. Business sentiment in Germany and the euro zone showed signs of recovery, primarily driven by improved export helped by the weaker euro. The Jefferies CRB index broke down through the February low at 269 and has now lost 5.1 per cent year-to-date with agricultural commodities the main contributors to the negative return. Sugar, cocoa, soybeans, corn and wheat have all had double digit falls so far this year.

Gold moved briefly into negative territory this week at one stage testing $1,085. A close below will open up for a potential revisit of the 2010 low at $1,045. The ongoing dollar rally has so far had limited impact, but the fact the market keeps making lower highs indicates that a correction is needed before a new attempt to the upside can be established. Short-term, some of this negative sentiment will be neutralised on a move back above $1,110. One positive sign is a recent pick up in physical demand, mostly out of China.

Crude oil remains stuck near $80 with the $83.50 having been rejected three times during March. The speculative long positions as recorded by the CFTC every Friday continues to rise with the latest reading showing a long position of 124,000 lots of WTI crude futures. The recent record high at 135,000 lots in January triggered a $15 correction in market price.

Although the outlook continues to favour the upside the dollar will near term continue to decide the direction. The relief rally in the euro and subsequent mover higher in crude highlight the stranglehold the dollar currently has on market direction. Above $83.50 the market will be targeting $85.90 while a break below $78.80 will target $76.30 with a potential for a deeper correction given the above long speculative position.

Demand out of Asia is still driving the recovery with Opec expected to ship more crude over the next month, primarily to China and emerging markets. Future expectations drive prices as the chart below clearly shows. Although the front month is trading almost unchanged from end of 2009 the forward price expectations have increased significantly during the past three months.

Grain markets ran into new technical selling this week as warmer weather for the US Midwest reduced the risk of delayed planting combined with weak export sales due to the strong dollar. Both wheat and corn are down 16 per cent on the year and the wheat outlook is fundamentally bearish due to large world supplies and aggressive competition for export business.

The outlook for corn is somewhat more supportive than wheat. Ethanol demand combined with farmers switching acreage towards soybeans should support prices going forward with the strong dollar being the main obstacle. A survey by Farm Futures magazine pegged corn plantings at 87.3 million acres, which is lower than previous forecast. On this basis we favour corn over wheat as a ratio trade, but will wait for the all important USDA reports about grain stocks and prospective plantings on March 31.

Near month corn broke through the 360 support level, but still holds above the 2010 low at 347.5 while resistance can be found at 366 followed by 375.

 

- The author is Senior Manager for CFD and listed products at Saxo Bank. The views expressed are his own

 

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