COMMODITY FUTURES FORECAST WEEKLY REPORT
The Weakback Greenback
Philip Gotthelf
I am not going to claim any level of clairvoyance when it comes to the dollar. Having been miserably stopped out of our short December Eurocurrency that I (unfortunately) added to on Friday, I am sidelined with no vision. The consensus is so bearish for the dollar and, consequently, bullish for the Euro that I hesitate to join the crowd.
Last week's news was peppered with articles about Europe's dissatisfaction with the dollar's slide. Japan fears a major setback if they are forced to raise export prices based upon deteriorating parity. U.S. trading partners are at a loss. However, President Bush seems to have someone whispering in his ear, "Let it fall, let it fall, let it fall!"
Not that President Bush has any direct control over dollar parity, but he can exert pressure upon the Fed to talk the dollar higher. The Fed or Treasury could move to support the dollar. There are a number of ways to reverse this downward spiral.
As I have mentioned like a broken record, dollar parity translates into some of the lowest U.S. agriculture prices in decades. Still, we are not at the bottom. Examine the Japanese Yen monthly continuation. We see that we are, indeed, approaching the 10000 reference resistance. A breakout above $1-to-100? could provide enough technical momentum to test the April 1, 1997 high of 12625, intra-day.
On the other hand, a test of 1-to-100 parity could insight the downside I have been waiting for. Strategically, the indication is to buy a breakout above 10000. Woe to that plan if we sell real resistance. Alternatively, we can sell 10000 with a reversal stop at 9500. Notice the similarities in the formations made during the last half of 2000 and now. The notable difference is the current breakout above the triangle.
A bust below 9000 implies a test of 8250 followed by 8000. Keep in mind that we are looking at a monthly continuation chart.
The December yen daily futures chart paints a strikingly different view with a breakout above the October/November upward consolidation channel. We have tested last April's 9750 high. This becomes the resistance to a move to 10000.
Timing is everything. Japan will square the books March 31. In the meantime, there is nothing fundamentally in the way of a stronger yen. Look at the explosive move above 9530. Then, look at last April's collapse. There is insufficient historical evidence to confirm a tendency toward an April high. However, the all-time high was achieved on April 1, 1997.
Can the dollar sustain such a beating for so long? The answer must be "yes" if 1997 is any indication. We do not have historical reference for the Eurocurrency, however, we can examine the U.S. Dollar Index lows made in 1991, 1992, and 1995. Notice that the Dollar Index did not bottom with the yen's top. There was some independence between European currencies and the Japanese Yen. According to the monthly Dollar Index history, we can see another 200-point decline before matching lows made during the last decade. Previous bottoms were followed by rapid recoveries. This means currencies have a propensity for exhaustion reversals.
Since 200 points is a considerable distance, it is not wise to pick a bottom as I have learned from the last several weeks and my attempt to ride out the execution of our short Eurocurrency call options. The better part of valor would have been to cover our Futures and call it quits. Alas, that human element of hope and/or desperation, sprinkled with some ego, cost us dearly.
Do I believe the dollar is oversold? Yes. Should we buy the dollar and/or sell the Euro now? Only on a technical signal. Right now, we have nothing but approaches to technically sensitive price levels. We can anticipate by entering on either the breakout or the bust.
Dare I try again, but there are some ratio spreads that may offer salvation. The February Eurocurrency 135 X two 136 call ratio spread is approximately 60/67. This looks like a reasonable assumption with 44 days to expiration. With today's action, the December 132 X 2 13250 call ratio spread offers about 30 with 9 days to expiration.
Depending upon the overnight or Friday's open, I am inclined to take such chances during the holiday week. The December ratio spread should be safe up to 13330. It is risky, but a stall or a push between 13200 and 13250 yields 1 to 50 points.
We cannot look to the chart for help because we are in new high territory. However, if we measure from the breakout above 12400 to the 12800 consolidation, we get a projection to 13200...about where we are.
Anyone who trades currencies has that uneasy feeling that we are about to reach some turning point. The problem is deep pockets. Some 200 to 400 more points represents considerable money for most moderate traders.
I can't help thinking that we are going to miss the turn around...initially. As in the past, once the dollar decides it's time to recover, it will take the majority of the adjustment (first leg) fairly fast. Given upside volatility, there is a chance to ride call spreads down. I would like to add the puts, but a bust could leave us in the same situation with puts as we experienced with calls.
We still have not seen a major pop in interest rates from the 10-year to the 30-year. This is one reason the dollar has failed to regain a footing. The December 10-year notes look like they are forming a weak upward channel, but remain below the 20-day and 40-day moving averages.
It's not comfortable going into a holiday week with pivotal markets, but there is little choice!
Attention Shifts To Commodities
When the front page article in The Wall Street Journal advocates for commodities, is it time to take a contrary view? The right-hand column entitled "In Tug-of-War on Stocks, Some Pull Away From the U.S. Market," in today's edition (11/24/2004) was proportionately deceptive. In reality, the emphasis was upon a shift from conventional investments (presumably stocks) into unconventional vehicles like physical commodities. Apparently, large fund managers are investing in raw materials in anticipation of an inflationary trend.
At the same time, the article sends a contradictory message that inflation is subdued. Unlike the commodity boom of the 1970's, we are experiencing growth with only modest inflation. Yet, the object of any physical accumulation of commodities is for price appreciation. One thousand ounces of gold does not issue a regular dividend nor does a warehouse full of copper.
This raises the question, "Have we entered a secular inflation?" If so, why isn't the Fed responding more aggressively? This is where the analysis become complex. I doubt anyone would deny that we have had selective inflation within some very important commodity complexes. Most obvious is the huge price surge in energy that affects everything from daily driving to airplane tickets and shipping costs. From heating our homes to cooking our food, energy is the price we pay and it hasn't been getting any cheaper...yet.
Then there are near record copper prices leading other base metals like lead, tin, zinc, aluminum, and even steel. Although the finger is directly pointed toward China, other economic expansion has consumed an increasing amount of these fundamental materials. If inflation "remains quiescent" as The Wall Street Journal article states, how can commodity prices be moving up so significantly and consistently?
November 26, 2004
Philip Gotthelf
Commodity Futures Forecast
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