by Paul Kavanaugh
COMMODITIES: The Impact of the Recent Dollar Rally on Commodity and Currency Markets
3/1/2010
COMMODITIES: The Impact of the Recent Dollar Rally on Commodity and Currency Markets
In July of 2008 when the U.S. Dollar Index was historically low, commodity prices were flying high. Crude oil was at an all-time high of over $147 per barrel, gold had broken above $1,000 per ounce and wheat prices were over $13 per bushel.
As the dollar moved higher in the "flight to quality" rally in response to the economic downturn in second half of 2008, commodity prices fell sharply, with crude declining by over 75 percent, gold falling by 30 percent and silver and wheat declining by nearly 50 percent.
SINKING DOLLAR
As the Federal Reserve eased monetary policy by lowering interest rates to near zero, purchasing mortgage-backed securities from banks and increased lending from the discount window to increase the money supply, the U.S. dollar began to move lower in March 2009.
This economic stimulus and the cheaper dollar drew huge amounts of speculative capital back into risk trades, including U.S. equity markets, energies and other commodity and currency markets.
DEBT CONCERNS OVERSEAS
However, in late November 2009, the dollar began to move higher once again, as the debt concerns of Dubai World and Greece came to light. The short U.S. dollar carry trade began to unwind.
The sovereign debt concerns of Greece spread to other European Union nations including Italy—one of Europe’s largest economies—Portugal, Spain and Ireland and may threaten the very future of the union as this crisis develops.
PRESSURE ON THE EURO
So the euro is now under very real pressure from currency speculators, with Commitment of Traders data showing the largest net short position in the euro since the currency’s inception in 1999, combining the deutschemark, franc, lira, etc.
Until some positive movement is made by Greece to lower its debt to gross domestic product ratio, it is likely the current trend toward lower EUR/USD will continue, and therefore, the U.S. dollar will continue its rise to test 8,250-8,375 resistance levels, (see the figure below).
If the dollar continues to rise, it will have significant bearish implications for risk trades, including long energies, stock index futures and commodity prices across the board.
PUTTING THIS TO USE
The euro has lost over 11 percent of its value relative to the U.S. dollar since late November 2009. An example of the significance of this decline is a call I received recently from a U.S. citizen who is in the process of selling his home in France and wanted to hedge his exposure on the $625,000 euros he will be receiving approximately 75 days after the contract is signed for his income tax purposes.
I suggested that he use the CME’s FX euro contracts to accomplish this, as each contract represents 125,000 euros. By selling five euro contracts short and holding them until he receives the euros for his home sale, he will be able to protect himself from exposure to a continued decline in the euro during the sale.
If the euro moves lower, he will have gains in his futures account to offset the lost value, and if the euro moves higher, the losses in his futures account would be offset by gains in the euro’s value.
This is a good example of using the futures market to hedge currency risk.
Feel free to contact me with any currency and commodity trading and hedging needs. For more information on this topic, sign up for my webinar on March 3 at: http://www.pfgbest.com/webinar.
.png "2010 USD 2")
IMM Currency Specs Increasing Bets Long USD
CFTC data released Friday February 26th showed currency speculators increased long positions on the US dollar from $9.69 billion to 12.77 billion in the week ending February 23rd, according to Reuters News. This represents the highest level since September 2008.
In addition the data shows the net short positions in the Euro rose to 71,623 from 59,422 is the highest since its inception. Also significant is the size of the net short positions in the Pound Sterling increasing to 92,884, where hedge funds and other large speculators on the short side outnumber longs by over 5 to 1. Speculators increased net longs in the Aussie and Canadian dollars over the same period.
JAPANESE YEN (Contracts of 12,500,000 yen)
2/23/10 week 2/16/10 week
Long 30,432 35,691
Short 28,715 21,779
Net 1,717 13,912
EURO (Contracts of 125,000 euros)
2/23/10 week 2/16/10 week
Long 32,728 34,459
Short 104,351 93,881
Net -71,623 -59,422
POUND STERLING (Contracts of 62,500 pounds sterling)
2/23/10 week 2/16/10 week
Long 13,882 13,922
Short 76,766 70,001
Net -62,884 -56,079
SWISS FRANC (Contracts of 125,000 Swiss francs)
2/23/10 week 2/16/10 week
Long 12,119 10,763
Short 20,938 15,430
Net -8,819 -4,667
CANADIAN DOLLAR (Contracts of 100,000 Canadian dollars)
2/23/10 week 2/16/10 week
Long 40,224 35,026
Short 11,803 11,571
Net 28,421 23,455
AUSTRALIAN DOLLAR (Contracts of 100,000 Aussie dollars)
2/23/10 week 2/16/10 week
Long 51,882 43,315
Short 12,890 16,312
Net 38,992 27,003
(Source Reuters)
Paul Kavanaugh
PFGBEST Research Team
pkavanaugh@pfgbest.com
IMM Currency Specs Record Short of Euro
2/22/2010
CFTC data released Friday February 19th showed currency speculators increased long positions on the US dollar from $9.41 billion to $9.69 billion in the week ending February 16th, according to Reuters News. This represents the highest level since September 2008. In addition the data shows the net short positions in the Euro rose to 59, 422 is the highest since its inception. Also significant is the size of the net short positions in the Pound Sterling of 56,079, where hedge funds and other large speculators on the short side outnumber longs by 5 to 1. Speculators maintained net longs in the Aussie and better than doubled net longs in the Canadian dollar over the same period.
Since their peaks in late November 2009, the Euro has declined by 11.2% and the Pound has shed 9% of its value relative to the US dollar. These currencies will likely continue to be pressured as sovereign debt concerns of its members (especially Italy with the regions second largest debt) as speculators move to the safety of the US, Canadian and Australian dollars while selling Euro Zone currencies.
Contact me directly for more information including short term currency trade ideas, a 2010 FX Product Guide and Calendar or to discuss the trading services PFGBEST can offer you today! Skype ID pfgpauly; Email pkavanaugh@pfgbest.com; or just call 1.888.439.6033.
Commitments of Traders (COT) Data as of February 16th.
(For each commodity, the COT reports provide information on the size and the direction of the positions taken, across all maturities, by three categories of futures traders)
JAPANESE YEN (Contracts of 12,500,000 yen)
2/16/10 week 2/09/10 week
Long 35,691 41,352
Short 21,779 18,956
Net 13,912 22,396
EURO (Contracts of 125,000 euros)
2/16/10 week 2/09/10 week
Long 34,459 34,867
Short 93,881 92,019
Net -59,422 -57,152
POUND STERLING (Contracts of 62,500 pounds sterling)
2/16/10 week 2/09/10 week
Long 13,922 14,012
Short 70,001 66,768
Net -56,079 -52,756
SWISS FRANC (Contracts of 125,000 Swiss francs)
2/16/10 week 2/09/10 week
Long 10,763 9,219
Short 15,430 16,115
Net -4,667 -6,896
CANADIAN DOLLAR (Contracts of 100,000 Canadian dollars)
2/16/10 week 2/09/10 week
Long 35,026 24,285
Short 11,571 15,422
Net 23,455 8,863
AUSTRALIAN DOLLAR (Contracts of 100,000 Aussie dollars)
2/16/10 week 2/09/10 week
Long 43,315 44,346
Short 16,312 16,740
Net 27,003 27,606
_Monthly_Continuation.png "2010 02 22 Euro")
Paul Kavanaugh
PFGBEST Research Team
pkavanaugh@pfgbest.com
Fed Hikes Discount Rate by One Quarter to 0.75%
2/18/2010
Breaking News:
The FED has raised the discount rate by a quarter to 0.75% as of 330pm central time February 18th, 2010. This is bullish for the US dollar and bearish for risk trades including long crude oil, stock indices, precious metals and currencies especially the Euro, British Pound and the Japanese Yen futures. Contact us for specific trading suggestions and strategies to position your account to potentially benefit from this change in the Federal Reserve’s monetary policy.
Paul Kavanaugh
PFGBEST Research Team
pkavanaugh@pfgbest.com
There is a substantial risk of loss in trading futures and options.
Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
