The dollar index weakened further to a 1-3/4 month low as strength in global equity markets and an easing of European debt concerns reduced the safe haven demand for the dollar.  EURUSD is consolidating near its recent 1-1/2 month high.  USDJPY climbed to a 3-month high and is modestly below its all-time high of 75.35 per dollar.  Bearish factors include (1) speculation China may provide funds to aid the European debt crisis, which boosted the euro after Chinese Premier Wen Jiabao said China is still researching the best way to participate in the EFSF, (2) the unexpected upward revision to the Jan German PMI to a 6-month high of 51.0, and (3) concern the foreign-exchange market is too one-sided against the euro, which may fuel short covering after CFTC data showed large traders increased their short euro positions to a record for the fifth consecutive week as euro short positions climbed to a record 171,347 as of Jan 24.  Bullish factors include (1) concern the ongoing Greek debt-swap talks may stall after Jean-Claude Juncker, head of the Euro-Zone finance ministers, said the Greek bond-swap talks with private creditors are "ultra-difficult," and (2) speculation Japan may  close to resuming intervention in the currency market after Japanese Finance Minster Azumi said that we “can’t overlook” speculative moves in the foreign-exchange market and will take “decisive” actions if necessary. 

Fundamental Outlook—Short-Term Bearish—The dollar remains bearish on euro short covering along with the Fed’s pledge to keep interest rates at a record low until late 2014.  However, U.S. economic strength along with concern the European debt crisis may worsen (i.e., a stall in Greek debt-swap talks) may reignite a dollar rally.

Gold strengthened further to a 2-month high.  Bullish factors include (1) the slide in the dollar index to a 1-3/4 month low, (2) the Fed’s extension of its forecast for “exceptionally low” interest rates through at least late 2014, (3) demand for gold as an alternative asset with the ongoing European debt crisis, and (4) demand for gold as an inflation hedge after the ECB lent European banks a record 489 billion euros for 3-yrs, the PBOC cut banks’ reserve requirements for the first time in 3 yrs and the Fed and 5 other central banks cut the cost of emergency dollar funding for European banks.  Bearish factors include (1) long liquidation pressures after gold holdings in ETP’s rose to a record 2,360.8 tons last month and (2) reduced inflation concerns after Dec Euro-Zone CPI fell to a +2.7% y/y increase from a 3-yr high of +3.0% y/y in Nov.

Fundamental Outlook—Bullish—Gold prices are bullish as dollar weakness continues on the Fed’s pledge to extend its record low interest rates until at least late 2014.  The long-term trend for gold remains bullish due to the European debt crisis, uncertainty about the Chinese economy, and extraordinarily easy G7 monetary policies.

 

Copper prices fell back from their recent 4-1/2 month high.  Bearish factors include (1) the weaker-than-expected Q4 U.S. GDP of +2.8%, (2) the IMF’s cut in its 2012 global growth estimate to +3.3% from Sep’s +4.0%, and (3) concern that Chinese copper demand may wane after Q4 China GDP fell to a 2-1/2 year low of +8.9% y/y.  Bullish factors include (1) the fall in the dollar index to a 1-1/2 month low, (2) the plunge in LME copper inventories to a 2-1/3 year low as LME copper canceled warrants (orders to remove copper from LME monitored warehouses) rose to an 8-yr high of 97,150 MT, (3) supply concerns after Rio Tinto, the world’s third-largest mining company, said its copper production fell -23% y/y in 2011, (4) the rise in Dec China copper imports for a seventh month (+48% y/y to a record high of 508,942 MT), and (5) ICSG’s prediction that reduced mine production will push the global copper market into a 201,000 MT deficit in 2011 and a 256,000 MT deficit in 2012.

Fundamental Outlook—Bullish Consolidation—Copper is consolidating just below recent gains.  Prices have recently strengthened on long-term supportive factors include (1) supply concerns, (2) continued strong Chinese demand, (3) long-term emerging-market demand for copper, and (4) lagging copper mine investment and production.

 

 

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