The (Commodities) End is Nigh...or Not

While cyclical challenges remain tough in global commodities, structural realities look more tolerable.  According to conventional wisdom, the challenges of global commodities can be attributed to China’s slowdown and poor growth prospects. Advanced economies are not immune. In the US, just two commodity-related sectors – oil and gas, as well as metals and steel – accounted for more than half of the defaults in 2015.

How About That Loonie, eh?

It has been painful trying to pick a bottom of the US dollar against the Canadian dollar.  Now a 4-5 point downtrend from the secondary high in late-January is being violated today.  It is found near CAD1.2785 today.  Intraday penetration is one thing, but some models may take the signal on a closing basis only. 

The US dollar recorded the multi-year high against the Canadian dollar on January 20 a little below CAD1.47.  Since then the Canadian dollar has been the strongest of the majors, appreciating 13.3%, while the Japanese yen has risen 9.7%.

Holding on to the Dollar's Null Hypothesis

In quiet turnover, with China, Hong Kong, Singapore and London markets closed, the US dollar is trading with a heavier bias against all the major currencies.  Lower commodity prices, including oil and copper, appears to be taking a toll on some emerging market currencies, including the South African rand. 

Pre-Central Bank Meeting Futures Moves were Expected

Speculators in the futures market made mostly small position adjustments in the sessions leading up to the FOMC and BOJ meetings.  During the Commitment of Traders reporting week ending April 26, the largest adjustment of speculative position in the currency futures was the 12.5 k build of gross long Australian dollar contracts. 

Bailing at the Bottom?

Speculators in the futures market continued to press a bearish view of the US dollar the CFTC reporting week ending April 19.  According to the Commitment of Traders report, speculators added to their gross long currency futures position in seven of the eight currencies we track. The exception was the British pound, where speculators liquidated a minor 1.1k contracts, leaving them with 32.8k gross long sterling future contracts.

Gold Soared, but Why?

Not so long ago, gold suffered the most challenging losses since 1999.  According to conventional wisdom, US rate hikes will contribute to its further decline. If that’s the case, why did gold prices soar during the last quarter?

At the turn of 2015, gold was driven by the broad commodity sell-off, especially the drastic plunge of oil prices that was fueled by the stronger dollar, along with concerns over China’s growth deceleration. Yet, the reality is that gold has low correlations with commodities and other asset classes.

China's (Gold) Fix is in and Hungary Offers Up Some Dim Sum (Bonds)

China launched its first gold fix.  It will offer a fixing twice a day going forward yuan. The Shanghai Gold Exchange established the fix the same way it is done in London and New York, by prices submitted by financial institutions.  In China's case, 18 institutions, including two foreign banks, participate in the process.

The key question for investors is if there is some larger implication of this development that they should be aware.  

CFTC: Empty BOJ Intervention Threat Edition

Speculators were undeterred by the threat of BOJ intervention.  In the CFTC reporting period ending April 12, speculators boosted their net and gross long yen positions to new record highs.  The bulls added 2k contracts to their gross long position to give them 100.1k yen futures contracts.  The bulls, who had tried picking a bottom over the past two reporting periods, gave up and reduced their gross short position by 4.1k contracts to 33.9k.  The resulted in a 6k increase in the net long position, lifting it to 66.2k contracts.

Are the Canadian and Australian Dollars Overextended?

The US dollar turned in a mixed performance last week, which given the softer than expected inflation, retail sales data, and industrial output figures, coupled with the poor technical backdrop, could be a signal that its decline in recent months has run its course.  

Does China Understand the SDR's Function?

At the IMF/World Bank meetings this week, Chinese officials are again pushing for greater use of the IMF's unit of account, Special Drawing Rights.  It is China's turn as the rotating host of the G20, which gives it greater influence over its agenda.  For its part, the IMF is concerned about global financial stability and must be open-minded.  It wants to strengthen the financial system.  It is only prudent to examine all reform ideas.