Today in Commodities: Dollar in the Driver's Seat

Am I suggesting getting long the US dollar…NO. However, the powers that be may push the dollar higher so I wanted to make you aware of this. The fundamentals do not justify a strengthening dollar, and talk of negative interest rates do not make me get bullish, but nevertheless be aware if the dollar rallies we may get a commodity pullback. We are still short the Aussie dollar with clients but may need to move to December as the September only has 8 days. This trade is more of a hedge but we feel 8100 is in the cards on a pullback.

Numerous people have contacted us questioning on why we would short oil. We would not outright but only against a long in natural gas, thinking the ratio may tighten up. Brutal… yes natural gas was down again today. You know where we stand, but just to clarify for all the haters: We are committed to be in natural gas thinking prices are way too low! We may lose on the next 2 contract months, but when it turns, we will be there with clients. Additionally, a thing about risk management -- when I say we are long or short a particular market, that does not mean my clients' whole portfolio is in that market i.e. natural gas. We may in fact continue to lose in natural gas, but the idea is we will try to more than make up those losses with other winners in other sectors.

Silver and gold are higher, clients remain long silver and unfortunately lightening up on gold yesterday. Caution getting too long if the dollar rallies.

Grains could move lower in the short run, we will ride December wheat and corn but will not be buying more until a bottom is more defined. We will be exiting our clients' cocoa shorts early next week, need further downside to get value. Sugar was higher by almost 5% today and broke out to a new contract high. We advised clients to lift their hedges at a profit and remain net long. See previous recommendation; long SBH10′ 25 cent call/ short (2) SBH10′ 35 cent calls.

We are trying to work out of the October 50 cent lean hog calls at 300 points o/b. Buy the dip in December 09′ and February10′ live cattle. We still like the spreads, October becomes the front month next week.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Comments

[Donald Ingram:]

You say the dollar is in the drivers seat? If this truly be the case, the vehicle that the drivers seat is attached to has no brakes, the accelerator is jammed wide open, the windshield is so badly cracked that you can't see out and the radio is blaring "Don't worry be happy now"!

Aug 28 05:10 PM

[GMiki1:]

I'm long nat gas. Whatever. :) Long gold and long silver--long a bunch of stuff currently on the losing side of the trade, but just you wait. In terms of the dollar, how far up can it go? Will it still buy stuff at that point?

Aug 28 07:25 PM

[rick12345:]

I wouldn't short the Aussie dollar if I were you; Their economy is in a stronger trading position, viz-a-viz Asia , than most people are willing to give them credit for. As we all saw Yesterday, it rallied when a lot of other currencies were hard hit. I'd be sticking with September puts since I think December will be a very strong month.

Aug 29 06:59 AM

[Slvrizgold:]

Driver's seat? In Ted Kennedy's car? Bradbard, are you Polish? I know a man from the ghettoes of Krakow and he looks like you. As for postulating that "the powers that be" will "push the dollar higher? ROFL. You must not be very intelligent if you haven't deternined TPTB *WANT* the dollar at a significantly lower exchange rate!!! LMAO!

As for "caution getting too long if the dollar rallies" that advice only applies to MORONS who like to play with fire and use massive leverage. For someone REAL, I would suggest getting MORE AND MORE LONG precious metals if the dollar rallied. Buying larger and larger in a pyramid fashion as price declined temporarily (the last good shakeout) before gold and silver supply shrink up - as I GUARANGOLDDAMNTEE the PTB are busy loading up physical gold for themselves and at a certain point all supply will disappear if price is low...

The market has made a nice rally, shorts are squeezed and Wall St houses are having fun swapping AIG Freddy and C back and forth with each other. Later the music stops and rational people understand Treasuries are INTRINSICALLY WORTHLESS SCRIP from a bankrupt country! Corporate bonds? Make me laugh! Other currencies? Maybe for a while, but they are all as crappy as dollars! Stocks? Get real, take a look at the 1970s and see how they performed in a stagflationary environment and a lousy economy!

PRECIOUS METALS ARE THE ONLY REAL MONEY! When the going is tough, the MONEY is the BEST thing to have! Millions and millions of people with wealth OWN NO GOLD AND SILVER. They WILL buy some. There is not enough available for everyone to have it for $2000 and $50 much less $950 and $14!!!!!

Aug 29 07:44 AM

[pdtor:]

Good article. If we do indeed go into recesssion, and the market drops off precipitously I expect stocks and commodities, precious metals,oil all to go down. When the tide goes out, even good stocks will be dragged down.There will be a flight to safety, the $US. Where else could you go? retention of capitol will be the name of the game. However, after this decline you should back up the truck and fill up with oil,precoius metals, agriculturals. Be patient as these pullbacks from highs come much later than exppected, but decline very quickly.
Happy capitalism

Aug 29 08:02 AM

[Michael Clark:]

I agree with those wondering why you would short the Australian Dollar. The U.S. Dollar seems to be a buy vs. the Canadian Dollar and the British Pound. Not a buy against either the Australian Dollar nor the New Zealand Dollar. Still negative againt the Swiss France but nearing a bottom. Still negative against the Yen. Negative but approaching a bottom against the Euro.

Oil is bound to come down if the U.S Dollar rallies, along with ALL world stock markets.

Aug 29 09:40 AM

[Justin M. Hall:]

Matt's call is dead on! Well done sir!

The folks, who are negating the play on nat gas, at these historical lows are dead wrong and just dumb. Except margin players, who really cares if it continues to drop from here?

I intend to BUY nat gas just before Congress is back in session.

Someone mentioned gold and silver above. Another way to play / hedge inflation in the current environment is platinum and/or palladium.

(SWC) is the domestic pure-play on both, platinum and palladium. On July 7, 2009, I noted that Stillwater Mining (SWC) was a buy. As of Friday, August 28, 2009, (SWC) is up 31.95%.

(SWC) was recently mentioned in the article at link below.
seekingalpha.com/artic...

It should also be noted that the FDA is expected to rule on (SPPI)'s NHL drug Zevalin on or before Labor Day, Monday September 7. It is telling that (SPPI) closed at a brand new multi-year high on Friday, August 28. Approval is highly likely and shares should rise upon the announcement.

Take a minute and check out (SPPI). I am confident that it will be well worth your time. I should point out that I have covered (SPPI) including their impressive cancer pipeline thoroughly over the past 7 weeks. The company has a very compelling story and worth a review.

Interested investors can check out this August 20, 2009 article on (SPPI) at the link below.
seekingalpha.com/artic...

One final thought: some of the folks commenting here really need to wise up. Good grief. After reviewing some of the comments above, it appears that the commi-freaks are running rampant in this neck of the woods. Take your anti-American negativity somewhere else. This author, whether you like him or not, is entitled to express his opinion. It is lawful under our Constitution, and diversity of opinion should be encouraged not ridiculed. For the love of all that is left good in our world, take any hate, anger and other BS somewhere else. The leftist rhetoric is old and stale.

And I'm sure what I just said will have a huge impact.


Justin M. Hall

Aug 29 10:51 AM

[Genesis:]

Instead of going short either oil or the Aussie dollar, you might consider shorting the Canadian dollar next time since it is correlated to the price of oil.

Aug 29 11:23 AM

[swygert@law...:]

Yes, it seems likely that the next two contract months for UNG will be disappointing, but "all things eventually return to the mean." Natural gas futures will rise -- of course, the only issue is when. At this point with UNG near $11.00, suppose one goes long and it falls to $9.00 within the next few weeks, I suggest that may only be a paper loss of less than 20%, and falling to $9.00 intuitively to me seems unlikely. But, when UNG rises, though probably never getting near its near $65 high of about two years ago, it is not unthinkable that it will provide investors with a very good long-term capital gain from its current level. Yes, I am long UNG and have bought bits and pieces as it has been going down. And yes, I may look up and see the knife falling on me. That's risk/reward.

Aug 29 12:22 PM

[iknow1:]

Great comment by Matthew. The direction of the dollar over the next 8 weeks can easily move commodities. If $ rallies, energy, grain, and softs will probably move lower and visa versa.

Here is an observation on the Dollar that that may yield some perspective regarding the direction over the next few weeks. On a weekly basis the dollar has seen a 10 week downward trend from the week of May 18 through the week of July 27 and this move was confirmed by selling volume on balance. During the 4 weeks since then, the dollar made new lows at 77.520 (basis Sept) and has basically traded in a tight range reaching a high of 79.695 the week before last.

Now take a look at the weekly $(Sept) chart you will see that the selling volume on the .90 point dip two weeks back did not exceed the selling volume during the week of July 27. To a lot of traders, this looks like bullish diversity from a volume viewpoint and a confirming rally after Labor days could turn everybody's charts very bullish.

Also, some traders believe that commodities trade in cycles.Take a look from the week of August 3 and count that as the first week of the cycle. Cycles are imperfect but I believe 90% can be fit into 10 to 12 week ( or 10 to 12 days ..etc) patterns. Last week would be week 4 of the present cycle. If this is a bull cycle then the lows look like they were put in on week 1 at 77.520. Conversly, if its a bear cycle, the highs probably were two weeks ago at 79.695.

Now here is the clincher. Two weeks ago the dollar closed on its keester at 78.100. This after taking out the previous weeks highs and then the previous weeks lows. Traders were looking for a washout last week and WHOA...what happened ? ...the lows held and the selling volume dried up.

My conclusion...Odds about 2:1 are the Dollar rallies and the 77.520 low is good.

But...Easy big fella, hold your horses....the present, 10 to 12 day, downward daily cycle won't end till Friday. This means traders probably won't see much above 78.895 early this week, and it should be a slow trading going into the holiday weekend. If this scenario pans out traders will be looking to buy the $ this week on pullbacks toward 77.75. For me, appropriate stops would be about $500 below the entry.

Reaffirming Matthew's comment, I am using this as a contrary indicator. Any buy in the dollar, would be a nice opportunity to sell Oct Crude or Nov Beans. If we dont get em its ok cause its better to make sure the highs are in on crude and beans than to probe and get stopped.

Tuesday Sept 8 looks like a great day for the $ to come out firing and jump aboard the bull train as the new daily cycle begins. Confirmation will be a take out of the previous Fridays highs.

Have fun and happy trading.
ik1

Aug 29 12:59 PM

[LKofEnglish:]

short oil seems a little odd. Long nat gas with unemployment at 10% seems totally insane. what do you use the stuff for right now? it can't be globally traded yet and probably never will. i see no reason why nat gas wouldn't stay low even as we come roaring out of this recession as the reality of a jobless recovery and the technology for using it in vehicles simply fails to materialize.

Aug 29 01:12 PM

[Dave Wrixon:]

It is quite clear to me as Matt has stated that the value of the dollar is being rigged to try to sustain an unsustainable debt position by the US Government. So yes there are powerful forces behind the dollar as the market is rigged, but it seems doubtful to me that they will prevail. They are not acting through strength, but rather desperation and the forces pitted against them are even stronger. Even the Uncle Sam cannot buck the market for long. But whilst this gargantuan struggle is in progress chatter about currency pairs would best be reserved for twitter. Everything else amount to a flea circus in the both of a side side-show.

Aug 29 05:40 PM

[auto44:]

Short term betting on any market to me is the same as vegas. The house(brokers etc.) win and the player lose. You rarely hear about the losses,but hear much about the wins.

Aug 29 06:41 PM

[ManAboutDallas:]

The US$ is going to have occasional one-day, two-day, one-week-at-most rallies. So what? When the Secretary of the Treasury of the United States goes to China and gets LAUGHED AT TO HIS FACE - by a groupe of students, no less - the takeaway lesson is that the U.S. and by association the US$ are the new laughingstock of the world. So, the only remaining things on the U.S. "to do" list are to officially change the name to United Banana Republic States of America; change the National Anthem to o/~ "Yes! We Have No Bananas. We Have No Bananas, Today!" o/~ and start a 24/7 crash program to manufacture as many wheelbarrows as possible, because they're the only thing that's going to be in demand, and have a nice, safe place from which to watch The Second American Civil War.

Aug 29 08:36 PM

[Chris - Lon...:]

The dollar's strength is decided by those that manipulate it. If and when the US dollar rallies, I will simply buy more commodities. On a side note; if the dollar strengthens it will give foreign governments the green light to sell their holdings and buy REAL STUFF, which will then cause an even bigger downward spiral... How else did the $USD get to 77 so quick? Thank Mr. Bernanke and China who are busy not-so-secretly selling their holdings. The fundamentals just stink.

Aug 30 02:38 AM

[Belome:]

"The folks, who are negating the play on nat gas, at these historical lows are dead wrong and just dumb. Except margin players, who really cares if it continues to drop from here? "
Jason.. natgas has impoded 30% in the last three weeks! and Matthew wont give up on the call. There is no technical or fundamental signal forming to support a buy in natgas. Buying it because its cheap will ceratinly have cost you some money since the bear move started in July of 09 at $13.50 How about we do things the old fashioned way and wait for a confirmation of a bottom and buy it then?, and stop calling people who disagree with you dumb.
Corn, wheat, hogs, milk... same thing... we are or soon will be flooded with the stuff and they are not rallying on a weak dollar. Most all commodities will work lower because of weak consumer and industrial demand. Grabbing a number out of thin air and buying based on emotional attatchments to old valuations is what seems dumb to me.

Aug 30 03:02 AM

[The Retired...:]

I wish people had the time and the courage to demonstrate. It may not do much good because the game is rigged by the bankers and w/st.
I have am in a position that I did the safe thing.
L.O.L. I paid off my Mort. Now I can't sell so Im locked in. ugh!



On Aug 29 08:36 PM ManAboutDallas wrote:

> The US$ is going to have occasional one-day, two-day, one-week-at-most
> rallies. So what? When the Secretary of the Treasury of the United
> States goes to China and gets LAUGHED AT TO HIS FACE - by a groupe
> of students, no less - the takeaway lesson is that the U.S. and by
> association the US$ are the new laughingstock of the world. So, the
> only remaining things on the U.S. "to do" list are to officially
> change the name to United Banana Republic States of America; change
> the National Anthem to o/~ "Yes! We Have No Bananas. We Have No Bananas,
> Today!" o/~ and start a 24/7 crash program to manufacture as many
> wheelbarrows as possible, because they're the only thing that's going
> to be in demand, and have a nice, safe place from which to watch
> The Second American Civil War.

Aug 30 05:12 AM

[Paul_L:]

Hi Matt, is there something I can read more on "where the powers that be may push the dollar higher"? Thanks in advance.

Aug 30 05:15 AM

[Jan Paul:]

On Aug 30 03:02 AM Belome wrote:

Corn, wheat, hogs, milk... same thing... we are or soon will be flooded with the stuff and they are not rallying on a weak dollar. Most all commodities will work lower because of weak consumer and industrial demand. Grabbing a number out of thin air and buying based on emotional attachments to old valuations is what seems dumb to me.
===================

Demand isn't low on some of those things. They are global products. A wheat rust spreading across Africa and into the Middle East may also mean rising wheat prices. The U.S. only has 300 million of the 6.78 billion global population. Of that, about 2 billion are middle class consumers (earnings, not standard of living as you can be a billionaire and live in a nation without good infrastructure)

Millions are going from one meal a day to two or three and eating more and higher grade foods. This is going to be a problem as places in both the northern and southern hemisphere are having crop problems that may outweigh bumper crop projections in other places.

Our prices will be determined by the global demand and global economy. If the current "global recovery" is an illusion then yes, prices on almost everything will go down when that illusion is revealed and the markets fall.

But, if the global recovery is real, then even if we are in a depression, we will see high prices for anything sold globally.

Aug 30 01:40 PM

[Belome:]

Jan... I don't disagree with you in the long run say 3-5 years. But in the short run we still have excess capacity with a relatively weak consumer in the economies with the most money.... that is a recipe for deflation. So what historical context will we use when we say prices are cheap? How far back do you want to go? In Aug of 2002 nat gas was 2.8, hogs were 30$ and crude oil was 30$ and wheat was 3$. Are we really in a position to consume more of these products than we were then? Be careful jumping into commodities assuming they will return quickly to the inflated values of the last 3 years. This will be especially true if the dollar rallies over the next six months to a year.

Aug 31 01:28 AM