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A Steady Rise in US Spending and Drop for the Dollar Generates Crude’s Biggest Rally in 6 Weeks

A Steady Rise in US Spending and Drop for the Dollar Generates Crude’s Biggest Rally in 6 Weeks

2010-03-29 22:29:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

A Steady Rise in US Spending and Drop for the Dollar Generates Crude’s Biggest Rally in 6 Weeks

Crude Oil (LS NYMEX) - $82.26 // $2.26 // 2.82%

The combination of a steady advance in investor sentiment, a retreat for the US dollar and a terrorist attack in Russia would encourage an advance from crude prices. And, proving that this was the correct combination of risk appetite and uncertainty needed to get the speculative crowd’s interest, Monday’s rally was the largest since February 16th (when the market was in the middle of a strong bull trend). However, there is a notable contrast between this impressive rally and the one staged back in the middle of February. This time around, the surge developed within a congestion zone that holds notably below $83 and the psychologically important $84 level. There are still momentum and fundamental hurdles to overcome before this market revives its long-term bull trend. Nonetheless, underlying the correct mixture of fundamental factors this morning was the steady climb in risk appetite. While a critical assessment of the market backdrop may fall short of encouraging a significant buildup in speculative positioning, consistent inflows of capital into specific asset classes (as can be seen in the steady climb in the Dow Jones Industrial Average) have helped to maintain a general bias in an otherwise flat market. From the Dow, a new 18-month high close on the day has kept bulls in control for another. A more active contributor to oil volatility today though was the tumble from the US dollar. Quickly curbing last week’s remarkable breakout, the depreciation in this pricing instrument has leveraged the alternative store of wealth function that this physical commodity has recently exuded. On the other hand, if oil’s strength were simply a factor of the US dollar’s weakness and rising risk appetite, crude priced in Australian dollars would see little to no advance. Yet, in fact, this measure would also appreciate significantly. On this point, we factor in the morning’s terror attack on the Moscow subway system. The uncertainty such events generate may not last long; but they can nevertheless be quite dramatic.

Accounting for those sentiment-based drivers behind crude’s appreciation, it is evident that they are still temporary. In contrast, the supply-and-demand updates are feeding into a larger rebalancing of fundamental interests. Raising the outlook for growth (and thereby the demand for energy to fuel said expansion), the US Commerce Department reported a fifth consecutive monthly increase in personal spending trends. In the scheme of supply-and-demand, a reduction in output is effective but it is consumption that holds the greatest sway over longer-term price trends. In other news, Japan reported its largest increase in retail spending in nearly 13 years while confidence in the health of the Euro Zone economy rose to a 22-month high. These may be small adjustments to global activity, but they are also more permanent. On the other side of the oil consumption gap, the outlook for this week’s Department of Energy inventory report is already calling for a ninth consecutive increase in stockpiles. Already set in the longest build since May with refinery capacity running at 81.1 percent, there is little long-term weight for balancing the market from the supply side anytime soon.

COMM329a

Commodities - Metals

Gold Advances for a Third Day but Gains Notably Smaller than Silver, Crude

Spot Gold - $1,110.00 // $2.50 // 0.22%

The same drivers that led the energy bloc and silver to significant rallies Monday were playing in gold’s favor as well. However, there was a notable contrast between the momentum that gold would set versus its counterparts. This distinction likely resides in the metal’s multiple fundamental roles in an otherwise complicated market backdrop. For leverage, the US dollar’s tumble was perhaps the most influential dynamic for price action. The benchmark currency not only retraced gains from last week; but it has pulled back to the point where the subsistence of a renewed bull trend has been cast into doubt. As one of the market’s favored dollar-alternatives (outside of other currencies), gold would stand to benefit substantially if the greenback lost conviction in an advance that has developed since the beginning of December. Another unique driver for the commodity Monday was the bombing of the Moscow subway system. The uncertainty this event provoked leveraged the metal’s historical role as a safe haven. Offsetting some of the “fear” premium the metal would otherwise have attained however, there was an appreciable improvement in confidence surrounding the health of Greece and the Euro Zone this morning. Following last week’s bailout plan accord, Greece announced a sale of 7-year government debt to raise 5 billion euros and start raising the necessary funds to roll over maturing obligations. Conditions seem calm for now in the Euro-area; but should the mere promise of a bailout prove insufficient, the fiat-hedge value of this commodity will quickly recover.

Spot Silver - $16.33 // $0.44 // 2.58%

Silver enjoyed its largest single-day rally in nearly six weeks Monday thanks to the combined influence of appreciation in surface sentiment trends and a drop in the US dollar. The climb in equities (benchmarked by the Dow Jones Industrial Average) was the less significant driver. While the benchmark has maintained a steady appreciation these past few months, there is little in the way of momentum to support it and the building of enduring investment positions is giving way to more sensitive speculative trades. In contrast, the dollar’s stark reversal of a freshly renewed bull trend has caught a greater segment of the market unawares.

COMM329b

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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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