The short covering rally in EURUSD ahead of Easter was abruptly halted as uncertainty about Greece’s ability to repay its debt saw the dollar regain lost ground.
The economic outlook outside Europe continues to improve which leaves investors somewhat confused about what theme will be the dominant in the near future. Greek government bond yields rose dramatically with the two year yield rising by nearly 2.5 percent in less than a week to levels not seen for 12 years. Recent data indicates that the Euro zone recovery stalled in the fourth quarter highlighting the slow return to growth in continental Europe.
Risk appetite elsewhere remains at elevated levels with broad based gains seen on commodities early in week.
The CRB index reached a 10 week high driven primarily by the metal and energy sectors before a resurgent dollar removed some of the support.
WTI Crude oil saw a new high above USD 87 after breaking out of the six dollar range that had been in place for several weeks. Profit taking after the weekly crude inventories rose for the 10th week in a row saw it trade lower towards support at 83.95, the January high.
Technically a new trading range is currently being established with support at 84 followed by 83. Resistance above 87 will be the important 90 level which is 50 percent retracement of the 147 to 33 sell off back in 2008 to 2009. On a longer horizon the 200 week moving average has broken below the 100 week for the first time since 2003 and could indicate that further gains above 90 would be difficult to achieve.
OPEC recently expressed satisfaction about a price of oil between USD 70 and 80 knowing full well that a sustained rally in prices could jeopardize the global economic recovery. Much higher prices at this stage of the recovery will lead to concerns about a double dip. European consumers are already reeling from high energy prices brought about by the recent weakness of the euro versus the dollar, a move that traders expect to continue over the coming weeks. The major Wall Street banks are calling for prices to reach triple digits which unless the recovery takes a strong hold will be a worrying development with inflation and bond yields suffering as a potential consequence.
Gold continued it’s month long decoupling from the dollar as risk aversion on the back off the Greek crisis lifted both the dollar and gold with the latter finally managing to break higher from its recent range and enjoying the best week in three months.
For most of 2009 apart from Q1 where inflation expectations drove gold and the dollar higher (EURO lower) the inverse relationship was firm up until January when the sovereign debt worries began to lift gold and dollar again. Both gold and the dollar has managed to rally this past week with gold measured in Euros making new record highs.
Near term momentum and renewed financial flows as seen through the recent pick up in ETF demand will attempt to drive prices higher. The January high at 1,162 offers the next level of resistance followed by 1,180. Support will be the old highs at 1,145 followed by 1,133.
Industrial metals like copper, aluminium and nickel continue to surge as companies restock in anticipation of a global recovery in demand and subsequent increased manufacturing activity. The LME index of base metals jumped to a 20 month high this week. The investment flow however still seem to be the main driver as positive economic news has seen investors continuing to pour money into the sector. Until the market sees confirmation of actual consumption the elevated prices are vulnerable to a correction.
The price of sugar has begun to stabilize despite dropping another 4.5% on the previous week. The London based International Sugar Organization project a global deficit of about 8 million tons. Meanwhile China the second largest consumer after India may increase their imports after drought in one of their sugar producing regions has put their own output into question. The sell off that has seen the price of May sugar in New York dropping 46% since early February is due a correction with a break above 16.45 being the first sign of an improved technical outlook.
Finally the cost of buying European carbon emissions rose nearly five percent this week and was heading for its biggest weekly gain in four months. The rally happened on the back of market participants being caught short after the recent auction of permits which many had anticipated would pressurize prices. In the end news about higher electricity prices in Germany combined with a decent auction sent prices higher with the ICE exchange experiencing record trading volumes on the December 2010 futures contract.
