Weekly Outlook: Energies, Currencies, Metals

To figure out where commodities are going, the main questions that need to be answered are: what type of demand will come out of China and where is the US dollar going? Is the Chinese driven commodity boom over? Not over, but expect a significant slowdown. The Chinese government said that exports were down 2.2% in November from a year ago, the first decline in seven years. Imports were down almost 18%. Over the next few months commodity investors will need to closely monitor China’s economy. In terms of the dollar, after an 18% rally from mid September we have seen the dollar fold 6.5% in the last 3 weeks. We are betting that an interim top has been made and we will see a re-visit of the 75 level before we see 90 in the US dollar index. This should bode well for commodities that are priced in dollars. Deeper than that though, weakness in the US dollar should signal a modest stabilization for the global financial system as investors are becoming more willing to take some risks. Investors will remain skittish for months to come, but as the central banks race to zero, investor’s will look for other homes for their capital.

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Energies

February crude oil was up $5.43 or 12%, helped by a weaker dollar and anticipation that OPEC will announce another 1.5-2.0M cut in production this Wednesday. We see support at $43 with resistance at $51/52. It may be premature to call a bottom, but under the right circumstances; a weakening dollar, stable stock performance and OPEC cuts, we could see a bounce to $65. The US Department of Energy said that crude oil supplies were up 400,000 barrels last week to 320.8 million barrels. Supplies of gasoline were up 3.8 million barrels, more than expected thanks to increased imports. Heating oil supplies were up 1.7 million barrels. February RBOB was 14.22 cents higher last week gaining 14% with a close back above $1.00/gallon. Support is seen at the 9 day moving average at 1.0461 followed by 1.0000 with resistance at 1.2500.

To play OPEC or a potential short covering rally look at the January 110/120 call spread for $1400. This is a $4200 spread with only 9 days so you will get quick results, win or lose. Put in a gtc sell order for $3000 and if not filled look to hold until expiration with a break even at approximately 1.1350. A new low was rejected in heating oil with just under a 1 penny gain on the week. $1.50 should serve as the pivot point on the February contract. You could see a move back to the low 140s or to 1.65. At present we would advise waiting for more evidence on the sidelines for a futures play. We do see a trade back over 2.00 over the next 3 months, traders eager to get exposure could look at the 160/180 call spreads for $2500 or the 170/190 call spread for $2000; both in March.

The US Department of Energy said underground supplies of natural gas were down 67 billion cubic feet last week to 3.291 trillion cubic feet. Supplies are now down 1% from a year ago. January natural gas was down 22 cents, pressured by warmer temperatures across the US. This is the lowest price seen since August of 04’ and currently we are long and wrong with clients positioned in February $8 calls. We are still expecting a bounce and will either use a bounce to cut losses or potentially roll the position forward depending on the magnitude of the move. We see support on January between 5.40/5.45 with first resistance at 6.00 but we expect to see a trade up to the 6.25/6.75 level, the question is when and from where?

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Currencies

The BOC met and agreed to reduce its interest rate from 2.25% to 1.50%, the lowest in 50 years. It was the sixth cut this year and 25 basis points more than most were anticipating. Even in the face of this, the Loonie gained 1.69 cents last week largely helped by gains from energies and metals. As we have pointed out in recent posts we expect the triple bottom at 77.00 in March to hold. We suggested long futures and to buy the 82 calls and 78/82 call spread in March for $1500. Look for an exit on options at $2500-3000. For new entries look for a long entry between .7850/.7900.

The March Euro closed up 6.36 cents, the highest close in seven weeks, encouraged by comments from the ECB that the economy may start to recover in the second half of 09’. After a close above the 50 day moving average mid-week we saw strong follow thru to the end of the week. We could see a trade up to 1.36/1.37 but we do not see much more. Support comes in at 1.3285 and then 1.2930 with first resistance at 1.3560.

The Swiss National Bank lowered its interest rate target from 1.00% to .50%. The March Swissie gained 2.87 cents or 3.5% last week. Support has held for the last 4 weeks and we would now be exploring the long side buying dips. Support comes in at the 9 day moving average at .8366 with resistance at .8636. We expect the gap at .8821 from 10/30 to be filled in coming weeks.

The Aussie dollar was 1.65 cents higher last week which was a bit disappointing considering the rally commodity wide. Resistance is seen at last week’s high at .6757 with support at .6460 followed by .6350. We figure perhaps the Aussie had gotten ahead of itself moving 8.5% higher in the last 3 weeks and may need time to rest. We would be positioned on the sidelines.

For 6 consecutive weeks now the Japanese yen has strengthened against the greenback, gaining 1.94 cents last week and at one point trading as high as 1.1373; the highest level seen since August of 95’. If the carry trade unwind were to continue into 09’ we could see a challenge of 1.25; the highs from 95’. This would be an additional 14% increase on top of the last 4 month gains of 21%. We are currently flat with our retail clients looking for a long opportunity. Our best performing CTA which is up 120% ytd still has exposure and feels we have a way to go. They are positioned in both futures and options; contact us for more details. Support in March is seen at the 9 day moving average at 1.0850 followed by last week’s low at the 50% Fibonacci retracement levels at 1.0687. I would not be surprised to see a sharp pullback to 1.0525, which would do little chart damage. First resistance is seen at 1.1125. Japans’ central bank could cut rates on Friday from 0.3%, but we think they will hold and continue with quantitative easing.

The March pound picked up 2.40 cents last week. 1.4650 should serve as support with mild resistance coming in at 1.5100 and major resistance at 1.5350. We would be positioned on the sidelines expecting a bounce that would set up a good short opportunity.

The Kiwi dollar was only 10 ticks higher and at times was like watching paint dry. We suggest getting long futures with a stop below the previous week’s low at .5164 anticipating a move back over 60 cents in the March contract within the next few months. Patience will need to be exercised because this could be a slow mover. Interest rates after next week should be .50/.75% in the US and 5.0% in New Zealand; you do the math.

The March US dollar index fell 3.62 cents or just over 4.0%, the lowest close in seven weeks, hurt by expectations that the US will likely have to keep interest rates low for a long time. This was the largest weekly move since mid-October. Last week’s low challenged the 38.2% Fibonacci retracement with next support seen at 82.50. Resistance comes in at 85.60 and for now it appears an interim top has been established. We would advise selling rallies while the direction will largely be governed by the FOMC decision on rates, the Fed’s comments and how other markets react.

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Metals

March silver was 73 cents higher last week but remained in the $1.50 trading range we have been in for 8 weeks running. This may sound familiar because I have pointed this out the last few weeks; the significance is that we feel this market is acting like a coiled spring. The longer we see sideways action the larger the breakout; we expect the move to be to the upside. 10.50 still serves as resistance while a weekly close above that level should mean prices are on their way to $13-15. We continue to accumulate the December 09’ $15/20 call spreads and will be a buyer again this week for clients near $1700 if given the opportunity. We would be a buyer of March futures on dips looking for guidance from gold, crude and the dollar. We would start scaling into longs at 9.50 followed by 9.00 and as long as the 8.51 low from 10/28 holds, on a closing basis we like being long. Looking at the weekly charts both the stochastic and MACD still support that we are in the beginning stages of a trend reversal. The silver to gold ratio currently sits roughly at 80:1 and we feel next year it will revert back to at least 50:1. That being said if gold moves to$1000 silver should be at $20.

February gold was higher by $65.30 last week; this move mirrored the previous week’s move of $66.80 just in the opposite direction. This was a seven week high and principally caused by US dollar weakness and investors turning to gold amid financial uncertainty. $750 should continue to act as support with $835 as resistance, a level hit but not penetrated in prior weeks. A close above $835 should propel prices to $865. Although the daily movement shows tremendous volatility, looking at the weekly and monthly charts gives longer term traders cause for excitement. We have seen more notice from investors with an increase in volume and open interest in recent weeks. We have suggested to clients to look at $100 call spreads in April and June; one such idea was the June 800/900 call at $2700. Friday’s settlement was $3670.

Comments

[Socialism c...:]

And you trust what the Chinese government says??? Can't even trust our own!!

2008 Dec 15 05:55 PM