CURRENCIES The short-term trend is firmly bullish for the dollar index as it consolidates just below its recent 14-month high. The euro remains weak as it attempts to stabilize above its recent 4-year low, while the dollar/yen lacks direction as it trades on either side of 90 yen. Bullish factors for the dollar include (1) concerns the European sovereign-debt crisis is widening after the report that Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest bank by capitalization, has been unable to renew about $1 billion of short-term funding, and (2) concerns that funding pressures at European banks brought on by the region's debt crisis will lead to slower growth than in the rest of the developed world after the 3-month dollar Libor rate climbed to a 10-1/2 month high. Undercutting the dollar was the assertion from China's foreign exchange regulator that reports that it may dump some of its euro assets are “groundless.” A possible silver-lining to the European sovereign debt crisis may be increased exports for the 16 nations that share the euro currency. With the rest of the global economy currently expanding, the weaker euro should boost European export prospects and buttress the Euro-Zone economies from recession. Exports account for almost half of the German economy, Europe’s biggest, making up 47% of German GDP in 2008, the latest year for which full data are available. While government attempts to bring down bulging budget deficits may curb economic growth, the weaker euro should offset the negative effects of a slowdown and improve the profits and viability of European businesses. METALS GOLD—Current View - Gold prices in the past week rebounded on concern Europe’s sovereign debt crisis is widening to Spain. Fund buying supported recent price gains after holdings in the SPDR Gold Trust, the biggest ETF backed by bullion, surged to a record high. Dollar strength may limit further price gains along with a lack of inflationary pressures after the US April core CPI fell to a 44-year low of +0.9% y/y. The short-term will remain neutral unless gold takes out its mid-May all-time high or its recent 3-week low. Fundamental Outlook - Bullish Correction - Gold is in a correction mode, but the longer-term bull trend remains intact due to sovereign debt pressures, the likelihood that central banks will be slow to remove the massive amount of excess liquidity, and seemingly insatiable investment demand. COPPER—July copper prices recovered from their recent 3-3/4 month low. Bullish factors include (1) the +14.8% increase in Apr US new home sales to 504,000, its best level in nearly 2 years, (2) the expansion of the US manufacturing sector in Apr at its fastest pace in 5-3/4 years and Europe’s manufacturing sector in Apr expanding at its fastest pace since June 2006, signaling strength in the global economy, and (3) the fall in LME copper inventories to a 5-month low. Bearish factors include (1) Apr China copper imports declining for the first time in 3 months (-8.1% m/m and -2.6% y/y), (2) concern the debt crisis in Europe will slow its economy and erode copper demand, and (3) ICSG’s estimate of a 539,000 MT global copper surplus for 2010. Large specs as of May 18 cut their moderate long position to a now small long position of 7,225.

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