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Commodities Look to US New Home Sales for Direction, Italy a Wildcard

Commodities Look to US New Home Sales for Direction, Italy a Wildcard

2012-03-23 09:01:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • Crude Oil, Copper Aim Higher Before US New Home Sales Report
  • Gold and Silver to Fall if QE3 Expectations Continue to Dissipate
  • Fate of Italian Labor Reforms May Shape Risk Sentiment Trends

Commodity prices are looking to the US New Home Sales report for direction. Expectations call for a print at 325,000 in February, marking the strongest result in 14 months. A print in line with forecasts is likely to boost sentiment-sensitive crude oil and copper prices on hopes that a firming US recovery will help offset headwinds from a recession in the Eurozone and a slowdown in China slated for this year.

By contrast, gold and silver may decline as the outcome weights further on QE3 expectations while boosting the US Dollar and thereby applying de-facto pressure to anti-fiat assets. The greenback has notably demonstrated an ability to rise on supportive domestic economic news over recently as Federal Reserve officials began to gradually back away from ultra-dovish rhetoric.

Markets are also watching for the outcome of an Italian cabinet meeting where Prime Minister Mario Monti is pushing for a controversial labor reform package. The scheme is part of an Italian push to boost long-term economic growth in the hope that laying the foundation for key structural reforms now will encourage confidence and reduce borrowing costs, keeping sovereign solvency fears at bay.

Of the so-called “PIIGS” countries at the heart of the Eurozone debt crisis, Italy represents the greatest remaining threat to the region. The country represents the world’s third-largest bond market with close to €3 trillion in outstanding government paper, meaning a blow-up there is likely to have dire implications well beyond the borders of the single currency bloc.

The Prime Minister faces an uphill battle as labor unions mount fierce opposition to the reforms, disputing a component of the plan that would make it easier for employers to fire workers. A sentiment-supportive outcome likely to boost commodity prices will see the Monti administration press forward with its proposals. A watered-down package may rekindle risk aversion however amid renewed fears about Italy’s fiscal outlook.

WTI Crude Oil (NY Close): $105.35 // -1.92 // -1.79%

Prices continued to retest resistance-turned-support at the top of a recently broken Falling Wedge top having put in a Bearish Engulfing candlestick pattern below the 14.6% Fibonacci retracement at 108.32. It remains unclear whether the recent pullback represents a true reversal or merely a correction. A break of the 38.2% Fib at 104.75 would confirm the bearish scenario. Initial resistance now stands at 106.96, the 23.6% retracement.

Commodities_Look_to_US_New_Home_Sales_for_Direction_Italy_a_Wildcard_body_Picture_3.png, Commodities Look to US New Home Sales for Direction, Italy a Wildcard

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1645.90 // -4.53 // -0.27%

Prices continue to consolidate in a familiar range between resistance in the 1666.37-1677.05 area and the 38.2% Fibonacci expansion at 1638.49. A break higher exposes a familiar pivot at 1718.05 while a close below support clears the way for a move to the 50% expansion at 1590.82.

Commodities_Look_to_US_New_Home_Sales_for_Direction_Italy_a_Wildcard_body_Picture_4.png, Commodities Look to US New Home Sales for Direction, Italy a Wildcard

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $31.58 // -0.58 // -1.80%

Prices took out support at 31.67, the 50% Fibonacci retracement, exposing the 61.8% level at 30.37. The 50% Fib has been recast as immediate resistance. Longer term, a confirmed Head and Shoulders top chart pattern implies a measured downside objective at 26.84, which closely coincides with the late December bottom.

Commodities_Look_to_US_New_Home_Sales_for_Direction_Italy_a_Wildcard_body_Picture_5.png, Commodities Look to US New Home Sales for Direction, Italy a Wildcard

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.766 // -0.080 // -2.08%

Prices broke below support at 3.808, the 23.6% Fibonacci retracement, with sellers now aiming to challenge the 3.696-3.713 area anew. The 23.6% level has been recast as near-term resistance.

Commodities_Look_to_US_New_Home_Sales_for_Direction_Italy_a_Wildcard_body_Picture_6.png, Commodities Look to US New Home Sales for Direction, Italy a Wildcard

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 Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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