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Commodity Reversal & the Currencies

While market reporters are searching for the reasons why commodity markets turned south all at once, the one event that stands out for us in today’s Keynesian influenced market place is the announcement just ahead of the Easter weekend of the U.S. President’s prodding of the Justice Department to look into the role speculators played in higher oil and gas prices. While Goldman Sachs’ call to exit long-term commodity bets the week before was both timely and influential, it wasn’t till April 25th that silver, a leading indicator market for the chaotic commodities, topped out a hair below $50 per ounce. Given that it’s generally a combination of events that leads to major market turns, we would also have to mention the possibility of an overnight peace dividend that the capture and killing of bin Laden opens the door to. The U.S. overran Afghanistan with the stated goal of capturing bin Laden, dead or alive. Historically war is bullish for commodities while peace is not. With a stated victory in the war on terrorism, and no attacks on U.S. soil in the previous decade, perhaps the current administration can shift its focus to the even bigger global problem of inflation. The U.S. can take confidence in their successful defense of their stock market and economy from Wall Street’s foolishness and greed in 2008 and 2009, and now focus on how to modernize her own energy industry to take advantage of the huge onshore and off shore oil reserves. Such an effort would keep the price of crude moving lower and keep it lower.

While commodities are often an interesting investment class, they are far too volatile for most investors, and traders, compared to the more stable currency markets. The question now is what does a reversal in commodities mean for currency traders? The seemingly obvious market to address first would be the Australian Dollar. While analysts may refer to it as a commodity currency, traders know well that the Aussie owes its strength in recent years more to its interest rate policies, and demographics, than to its wheat crop and gold mines – the U.S.’s reserves of both commodities dwarf Australia’s holdings. Despite the moniker “commodity currency” the Aussie in our opinion is a market to consider buying a dip to the mid to low 1.00 handle as huge global interest rate differentials still favor it. The second currency of interest because of its relationship to commodities would be the Canadian Loonie. The dynamic is different here for two reasons: oil and demographics. Canada is rich in the first and lacking in the later. A reversal in commodities could have a more lasting effect on USDCAD. And the third currency, the euro; the last couple of weeks provided ample opportunity in both time and price for European bankers to hedge their exposure at much more generous prices than most analysts would have thought possible last year. And while time and price may be close to putting in a long-term top in this currency, the U.S. Fed’s insistence on buying 10-year Treasuries through June may just keep the euro propped up for a bit more by default of it being on the other side of 60% of the U.S Dollar Index. Over the long haul though, one last kiss of 150.00 for EURUSD over the next month may prove meaningless, as the combination of the Fed no longer supporting U.S. Treasuries, and commodity markets revering their 10-year bull run may finally prove enough for the Greenback to finally put in an intermediate-term bottom against the Euro, Pound, Swissy, and Yen.

Jay Norris is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011, and Mastering the Currency Market, McGraw-Hill, 2011.

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Commodity Reversal & the Currencies