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Crude Oil, Metals Sink as US Dollar Recovers Amid Risk Aversion

By , Currency Strategist
10 February 2012 09:55 GMT

Talking Points

  • Crude Oil, Copper Under Pressure Amid Returning Risk Aversion
  • Gold, Silver Probing Lower as Dollar Gains on Safe-Haven Demand

WTI Crude Oil (NY Close): $99.84 // +1.13 // +1.14%

As we noted yesterday, crude oil prices are re-coupling with market-wide sentiment trends after tensions in the Middle East disrupted the relationship last week. Indeed, short-term correlation studies suggest the link between the WTI contract and the S&P 500 now stands at the highest in a month (0.80 on 5-day percent-change studies).

Futures tracking the benchmark stock index are trading sharply lower ahead of the opening bell on Wall Street as risk appetite falters into the week-end, threatening to carry crude lower as well. The University of Michigan gauge of US consumer confidence headlines the calendar, with expectations calling for sentiment to sour for the first time in six months in February.

On the technical front, prices remain wedged between support at 97.70 and resistance at the top of a falling channel set from early January, now at 100.22. The upside barrier is reinforced by a horizontal pivot at 101.28, with a break higher exposing 103.35. Alternatively, renewed selling that takes prices through 97.70 on a daily closing basis clears the way for a test of the channel bottom, now at 95.15.

Crude_Oil_Metals_Sink_as_US_Dollar_Recovers_Amid_Risk_Aversion_body_Picture_3.png, Crude Oil, Metals Sink as US Dollar Recovers Amid Risk Aversion

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1729.40 // -3.80 // -0.22%

The return of risk aversion is once again stocking safe-haven inflows into the US Dollar. This is producing de-facto downward pressure on gold prices considering the yellow metal is denominated in terms of the benchmark currency. We expect the greenback will be well-supported through next week as global economic slowdown fears return to spotlight, meaning the current dynamic is set to continue to weigh on gold prices for the time being.

Prices are probing through resistance-turned-support at the top of a rising channel set from early January, with a break confirmed on a daily close below this barrier initially exposing 1702.90 and 1677.05. For now, the first layer of relevant resistance remains at 1763.00, although a break through support would nudge that lower to the channel top (now at 1730.19).

Crude_Oil_Metals_Sink_as_US_Dollar_Recovers_Amid_Risk_Aversion_body_Picture_4.png, Crude Oil, Metals Sink as US Dollar Recovers Amid Risk Aversion

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $33.90 // -0.08 // -0.22%

Silver’s fundamental profile continues to mirror that of gold, with the metal on the defensive as the US Dollar rides risk aversion higher. The gold/silver ratio continues to show a meaningful inverse relationship with the S&P 500, meaning the cheaper metal is likely to underperform if the current environment is to carry forward as expected.

Prices are testing through rising channel support set from late December, with a break lower initially exposing 32.78 and 30.57. Near-term resistance stands 34.37 (the February 2 high) for the time being, although a downward push would shift it lower to the channel bottom (now at 33.77).

Crude_Oil_Metals_Sink_as_US_Dollar_Recovers_Amid_Risk_Aversion_body_Picture_5.png, Crude Oil, Metals Sink as US Dollar Recovers Amid Risk Aversion

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.978 // +0.068 // +1.74%

Copper has come under pressure as rising risk aversion punishes the spectrum of growth-sensitive assets. As noted above, more of the same is expected next week. Prices are pulling back to resistance-turned-support at 3.938, with a break lower exposing a formerly broken channel top now at 3.835. Negative RSI divergence reinforces the case for a downside scenario. Alternatively, a reversal higher sees the next major upside objective at 4.193.

Crude_Oil_Metals_Sink_as_US_Dollar_Recovers_Amid_Risk_Aversion_body_Picture_6.png, Crude Oil, Metals Sink as US Dollar Recovers Amid Risk Aversion

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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10 February 2012 09:55 GMT