Will US Dollar Trump Commodity Prices?
Dec 22, 2010
There is an interesting trend developing that we need to keep an eye on, and a battle taking place in the markets on two opposite sides of the fence. One massive group of traders is betting that the commodity markets will rally even further, while another massive group is betting that the dollar will strengthen dramatically in 2011. The question is who will come out on top? I know it is hard to believe, but I actually think both groups have a chance of being highly profitable. Even though traders have almost tripled their net-long positions in several futures markets during the past five months. I think there is still room to move higher despite an increase in the US Dollar. Yes, I realize that the US dollar has moved in the opposite direction of commodity prices in 18 of the past 22 quarters. I just continue to believe China’s 10% annual economic growth and surging inflation will help push commodity prices even higher despite the action of the US Dollar. This could be a fairly cold statement considering about $4 trillion in currencies trade every day on the world’s exchanges, compared to just $391 billion worth of futures and options on raw materials. This is often hard for commodity and stock traders to believe, but the currency market is absolutely massive compared to commodities. A stronger Dollar could certainly keep a lid on prices but I highly doubt it will be able to hold these markets down forever.
Quick Thoughts from December 22nd 2010:
- The cash corn market continues to be extremely slow. Most end-users seem content on waiting until after the first of the year to price more corn. They believe more farmer selling and fund rebalancing should give them a better opportunity. That is certainly very wishful thinking on their part, we will see how it works out for them in just a few more weeks. Those could make for some sleepless nights...
- Iraq purchased 100,000 metric tons of Hard Red Winter wheat from the US and 150,000 metric tons from Australia. The premium of Kansas City Wheat versus Chicago Wheat has now exceeded $0.60 cents. I had first recommended this trade back when Chicago was at a significant premium to the KC. Wow, what a great trade this has been. I will be rewarding the market and banking some of the profits, I will remain in the position on a smaller scale looking for the premium to reach $0.80.
- I am hearing that after a slight cold front passes through in Argentina this weekend, weather will again heat back up. You have to believe the cold front may bring along some scattered showers and thunderstorms, but I am doubting it will be enough to ease concerns. I am also hearing most of the rains will once again fall further North, leaving the main corn areas high and dry.
- Wheat traders are still mulling over the thoughts and concerns that Russia may actually extend its current grain-export ban beyond the summer, and what delays in fertilizer shipments mean for their crops.
- The numbers out of China for November show demand for refined crude oil products rose by more than 15% compared to year ago levels. China's demand for oil and fuel just continues to push higher. I am starting to jump on the bandwagon that China alone is going to carry the crude oil market.
- Here at home inventory data released yesterday showed a larger draw down on crude oil stocks than many traders had anticipated. This certainly adds to the bullish sentiment, and has pushed Crude Oil above $90. Lets just hope the draw downs in supply are not a direct result of year-end inventory management but rather an increase in demand.
- Staying with the "fuel" theme, you may want to do some research on "naphtha", a product used in the refining process. Reports from those on the inside in Saudi Arabia are saying that there is an extremely rare shortage of "naphtha" right now, and has in fact delayed January shipments. On top of increasing demand, this may be another reason unleaded gas is surging to new highs.
- In addition I continue to hear reports circulating about a fuel refinery in the Virgin Islands that produces over a 150,000 barrels of unleaded gasoline per day that is still down and out of operation. I have to believe eventually this could place a strain on supplies, I will do more investigating to see if there is any long-term issues with the plant or if it is just a temporary glitch.
- I found it amazing to learn that since 1980 total world "nitrogen" fertilizer application has increased by 7 times, if you really want to hear something crazy, China‘s nitrogen use during the same time period has increased by 45 times....Wow
- Some guys over at Informa are stepping up to the plate early and confirming that they believe that the EIA ethanol production data was actually in error the past 2 weeks and that the error will be fixed in today's report. Today's report will reflect on production for the week ending Dec 17th. Informa’s impression is that ethanol production still was a record and on track for a 2010/11 ethanol corn grind that matches or somewhat exceeds their forecast of 5,000 million bushels, but it will be revised slightly lower. These guys are generally tied in tight to the USDA, so they might be right on track. If they revise the 939 and 937 billion barrel per day numbers significantly lower we will break at least for the short-term. Pay attention to these numbers. If they revise them to 920 or 915 billion per day it will not be that big of a deal, something massively lower would be a problem. The numbers should be out right around the opening bell.
- Cotton continues to race higher and in fact closed at all time 140 year highs yesterday. What an amazing run this market has had, hope some of you have been a part of it.
- Don't forget the USDA will issue its latest weekly Export Sales report tomorrow morning.
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