The potential elimination of rate hike guarantees into December, signaled by Federal Reserve Chairman Jerome Powell on Friday, could lead to more profit-taking in the dollar this week, while giving commodity bulls the chance to chase up prices of everything from gold to copper and crude oil.
Speaking to central bankers and economists at the Jackson Hole symposium in Wyoming, Powell warned against the risks of hiking rates too quickly or too slowly and postponed discussion on how the Federal Reserve might set policy in 2019 and beyond. The US Dollar Index, measured against a basket of currencies, fell nearly 1 percent on the week in reaction to his remarks—the global reserve currency's sharpest weekly decline since March.
Risk-On Mode
Aside from the generally favorable outcome to commodities expected from a weaker USD, the expectation is that the positive technical and fundamental backdrop should also help reduce short, or bearish, bets in metals and energy markets, analysts said. In depressed grains markets however, from soybeans to corn and high-performing agriculture such as cocoa, selective buying is expected in line with recent trends and weather forecasts.
But overall, commodities should be in “risk-on” mode, along with equities, although a bear trap may be in place for stock market investors. “Dovish undertones from Powell at Jackson Hole (have) provided a tailwind to risk assets,” TD Securities said.
Until Friday, the dollar had mostly rallied since the end of June, as speculators bet on two Fed rate hikes before year-end. Investing.com’s daily technicals now recommend a “Sell” on the dollar, after the index’s settlement on Friday at 95.08. Strong support was only expected if the reading returned to the 200-day moving average of 92.30 – a low last seen in May.
A relatively light week of economic data, with China’s PMI being the most notable item on the calendar, also means there could be little to prop up the vulnerable dollar.
Gold, Copper In Position Of Technical Strength
Gold, which managed to end last week’s trade above the key $1,200/ounce level, will likely see more short-covering. TD Securities noted that from 19-month lows of $1,161.40 on August 16, US gold futures on the COMEX division of the New York Mercantile Exchange have reached a position of technical strength.
“Gold specs used (that) sell-off as an opportunity to increase length, adding more long positions in comparison to shorts,” the release said, referring to speculator positions outlined each week by the Commodity Futures Trading Commission.
On Investing.com’s daily technicals, COMEX gold for December delivery was rated as a 'Strong Buy" on Friday’s settlement of $1,206.30. Strongest resistance was seen at the 200-day moving average of $1,291.51, meaning there was still a potential upside of $85, or 7 percent.
In COMEX copper, traders had likely called a bottom after the start of US-China tariff negotiations and on signs of stability in emerging capital markets, TD Securities said.
Growing risk appetite aside, copper’s fundamentals have also brightened from inventory draws on the London Metal Exchange and Shanghai Futures Exchange—with the latter showing a near 50-percent stockpile drop since July, as Washington and Beijing began trade talks leading to their November summit. While last week’s interim negotiations saw little progress and more reciprocal tariffs, “given the elevated short positioning, any progress towards a trade deal could very well send copper materially higher as the year comes to an end”, TD Securities said.
Investing.com’s daily technicals maintained a “Buy” call on copper after the COMEX contract for September settled on Friday at $2.699 per lb. Despite that, stiff resistance to the contract was only seen at the 200-day moving average of $3.043 – leaving room for a 35 cent, or 13 percent, gain.
US Crude Turning Bullish Too
In US West Texas Intermediate (WTI) crude oil, sentiment also turned bullish after an extended period of bearish views permeating through the complex, said Dominick Chirichella, analyst at the DTN-owned Energy Management Institute in New York.
“There is still a high level of uncertainty over which side of the equation will win out… production increases or the potential additional loss of supply for the many geopolitical events evolving around the world, including Iran,” Chirichella wrote at the weekend.
Even so, in the last two weeks, “the (winning) view has shifted to the production loss side”, he said, noting that currencies—i.e. the weaker dollar—have become “a positive price driver” too.
Mike Seery of Seery Futures in Plainfield, Illinois, had a similar view. “The trend (in WTI) has been very choppy over the last four months as prices really have gone nowhere. However, I do have a bullish bias towards this commodity as I'm certainly not recommending any type of bearish position as this is the strongest trend to the upside next to the S&P 500.”
He cited runaway demand for unleaded gasoline and the Trump Administration’s resolve to make the US oil-independent as among those positive attributes for US crude that shouldn’t be ignored. “I will keep a close eye on this market for a possible pullback in price, while then looking at a bullish position.”
Investing.com’s daily technicals pegged WTI as a “Strong Buy” after the October contract on NYMEX settled Friday’s trade at $68.72 per barrel, blowing past 3rd Level Fibonacci resistance of $68.56.