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November 2009 Archives

November 3, 2009

Cotton Futures Move Closer to 70-Cent Level

Fundamentals

The upward momentum has resumed in Cotton futures after a nearly 2-week period of price consolidation, as traders fear less than ideal weather conditions will affect the quality of this year's U.S. harvest. Cold, wet weather has plagued the main Cotton growing regions in the South, hampering the pace of harvest. As of October 25th, only 19% of the U.S. Cotton harvest had been completed, vs. a 43% average for this time of year. The untimely rains have also brought concerns that Cotton quality will suffer as well, as dry weather is really what is needed during the current stage of development. Those doubting that the rally can continue point to less than stellar U.S. Cotton exports, especially to China, which is purported to be experiencing weather issues with its own Cotton crop this season. Seasonal hedge selling has been light so far, mainly due to the slow pace of the harvest, but should pick-up steam -- especially if drier weather comes to the Southeast and Mississippi Delta regions this week. Speculators, both large and small, are holding net-long positions in Cotton, according to the most recent Commitment of Traders report. As of October 27th, non-commercial traders were holding a combined net-long position of 67,603 contracts, up 544 contracts for the week. Unless December Cotton can take-out support at 65.47 on a closing basis, there is little reason for those long Cotton to abandon their positions -- especially if the harvest delays continue and the U.S. Dollar remains weak.

Trading Ideas

Given the bullish trend in Cotton futures, option traders believing that support at 65.47 will hold may choose to investigate selling out of the money Cotton puts in the soon to expire December contract. An example of this trade would be selling the December 65 puts, which expire on November 13th. With December Cotton trading at 68.00 as of this writing, the Dec 65 puts could be sold for 0.26 points, or $130 per contract, not including commissions. The premium received is the maximum gain on the trade and will be realized if December Cotton is trading above 65.00 at expiration. Given the risk of a naked short put position, traders who choose to employ such a strategy will probably want to closely monitor the trade, and may wish to exit the trade early should December Cotton trade below support at 65.47 before the option expires.

Technicals

Looking at the daily chart for December Cotton, we notice the market spiked higher in the middle of October, once major resistance at the previous highs of 65.47 were taken-out. Since that time, the market has attempted to test psychological resistance at the 70-cent level to no avail. Yesterday's rally attempt fell short of taking-out the recent highs of 69.49 made on October 15th and spurred fresh selling by hedgers and short-term speculators. Despite the late session selling, prices remain above the 20-day moving average, currently near the 66.35 level, which will now act as near-term support. The 14-day RSI has moved well-off its recent highs, but is still reading a supportive 60.74.

Mike Zarembski, Senior Commodity Analyst

November 4, 2009

Dollar Blues

Fundamentals

The Dollar Index is lower this morning, ahead of the FOMC policy statement. The central bank is not expected to fiddle with its current interest policy, and is widely expected to give forward guidance suggesting that they will continue to keep interest rates low for the foreseeable future. Dollar bears are looking for a statement that does not give any indication of when the low interest environment will come to an end. The greenback may get a boost if the FOMC at least sets a timetable for the conclusion of its aggressive expansionary policies, although this is highly unlikely because it could paint the Fed into a corner and take away its flexibility in the future. The Dollar Index has found some relative stability over the past two weeks on the pullback in equities and commodities. It looks as though the strong GDP data has not given traders enough incentive to boost their Dollar holdings. At this point, the greenback must continue to look to equity prices to find direction, as both the greenback and treasury market continue to trade inversely to stock prices. The only other scenario in which the Dollar could stand to benefit is if the ECB and BOE soften their tone and suggest that they will keep interest rates low for the foreseeable future as well, but this may be a long shot.

Trading Ideas

The Dollar does not figure to get much support from today's FOMC statement. The overall fundamental picture is still weak, but may be improving. The equity markets have shown some chinks in their armor, and a correction in equities may be just what the Dollar Index needs at the moment. However, the stock market has shown plenty of resilience for the past seven months, so there is no guarantee that the market will be in a corrective mode. Technically, the outlook for the Dollar is just as unclear as the fundamental picture. For this reason, some traders may wish to consider taking on a neutral strategy, like a long straddle. An example of such a trade would be purchasing the December Dollar Index 77 call (DXZ977C) and the December 77 put (DXZ977P) for a debit of 2.00, or $2,000. The spread risks the initial investment and the breakeven points would be 79.00 on the upside and 75.00 on the downside.

Technicals

Turning to the chart, the December Dollar Index seems to be trying to find a bottom. After coming down to test the key psychological support level at 75.00, the index has bounced. The December contract has closed above the 20-day moving average for the past four sessions, indicating that a near-term bottom may be in place. At the same time, the market has struggled when approaching the 50-day moving average, signaling a lack of trader confidence from the bull camp. A close above the average and a subsequent close above resistance at 77.50 could result in a longer correction to the downtrend. Failure to close above these levels could result in frustrated longs selling out of positions.

Rob Kurzatkowski, Senior Commodity Analyst

November 5, 2009

Will Gold's Historic Bull Run Spill Over Into Silver?

Fundamentals

The Silver market is definitely playing second fiddle to its more glamorous "yellow metal " cousin, as nearby Silver futures have not even reached yearly highs, while Gold continues to move into uncharted price territory. One of the possible reasons why Silver has not garnered the same attention as Gold may be due to its usage as an industrial metal. Despite signs that the worst of the recession may be behind us, we have only started to see improvements in industrial demand for Silver. Until demand really ramps-up, a significant market segment remains reluctant to bid-up prices to obtain supplies. The media's fixation with Gold's move to all-time highs has spurred interest by the public at large into Gold as an alternative investment to equities and bonds, with memories fresh to the steep stock market sell-off we saw earlier in the year. Silver prices, meanwhile, are still well off historic highs made back in the first quarter of 1980, when a short squeeze saw prices run-up to almost $50 per ounce! It certainly appears that the old market adage "buy low and sell high" is not how the public invests, but "buy high and try to sell even higher " might be more appropriate! One indicator metals traders look to for the comparative value of Gold vs. Silver is the Gold-Silver ratio. This ratio measures how many ounces of Silver it takes to buy one ounce of Gold. As of this writing, the Gold-Silver ratio was trading around 62.5, in other words 62 ½ ounces of Silver needed to buy one ounce of Gold. Although this is historically a rather high ratio, it is currently in the middle of the recent range between 45 and 85 that we have seen the past few years. It may take a move to the high end of the ratio before "value" traders start to embrace Silver as an alternative to Gold.

Trading Ideas

Some traders who expect Silver prices to continue to move higher but want to minimize the maximum risk on the trade may wish to look at strategies involving Silver options. An example of one such strategy would be buying a bull call spread, such as the March Silver 20 call and selling a March Silver 25 call. With March Silver trading at 17.51 as of this writing, this spread could be bought for 57.5 cents, or $2,875 per spread, not including commissions. The premium paid is the maximum risk on the trade, with a potential profit of $25,000 minus the premium paid should March Silver be trading above 25.00 at option expiration in February.

Technicals

Looking at the daily chart for December Silver, we notice the market continuing to hover near the 20-day moving average. We appear to be in the midst of a consolidation phase, as prices have moved within a $2.50 range since September. Though the major trend favors the bull camp, we do notice a significant bearish divergence in the 14-day RSI, which failed by a wide amount to make a new high reading when the Futures did on October 14th. Though this is a potentially bearish signal, the uptrend would not be negated until we see a daily close below the uptrend line formed from the November 2008 lows currently near the 14.35 area, or just over $3 below our current price levels. Resistance remains a good deal closer, coming in at the October 14th high of 18.175.

Mike Zarembski, Senior Commodity Analyst

November 6, 2009

Can Bond Bulls Avoid Collapse?

Fundamentals

Bond futures are little changed ahead of today's non-farm payrolls number, which is expected to show the US economy losing 175,000 jobs in October. The ADP jobs figure that came out on Wednesday and yesterday's initial and continuing claims data were both in line with expectations, suggesting the non-farm payrolls figure may not deviate greatly from forecasts. A contraction in the job market is never healthy for the economy, but the fact that the pace of the contraction is slowing can be seen as a significant improvement, as it would be the smallest drop in over a year. This could put the Bond market under pressure once again. The yield curve has been steepening, with the spread between short and long-term treasuries at the highest level since the middle part of the year. Next week's record $81 billion in treasury auctions suggests that investor demand may fall short of supply, which could push yields higher. Not only is the Bond market in oversupplied condition, but investors have shown an increased appetite for risk in recent months, favoring equities and commodities over government debt. Unless economic conditions worsen, this trend may persist.

Trading Ideas

There are not many bright spots for Bonds, technically or fundamentally. The December contract, however, has held support at this point, so it may be premature to short the Bond contract before any sort of technical confirmation. Some traders may wish to be patient and see how prices behave near support - others may wish to consider shorting a December futures contract on a significant close below the 117-25 level, possibly with a downside objective of 115-00 and a protective stop at 118-25. The trade risks a little over $1,000, with a potential profit of roughly $2,781.25.

Technicals

Turning to the chart, we see the December Bond contract coming down to test support, which comes in around 117-25. A violation of this support level may result in Bonds coming down to the low teens. The downward crossover of the 20 and 50-day moving averages can be seen as bearish for Bonds. Yesterday's price action centered around the 100-day moving average. Given the fact that Bonds are in the vicinity of support and the 100-day average, this is a critical juncture. How prices behave here will likely seal the fate of the Bond market in the intermediate term. Yesterday's narrow price action did result in a spinning top candlestick, hinting that Bonds may bounce a bit in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

November 9, 2009

Will Chinese Buying Revive Bean Bull Market?

Fundamentals

Despite less than ideal weather conditions as the Soybean crop entered maturity, traders and analysts are expecting an increase in the U.S. Soybean crop estimate when the USDA releases its November Crop Production and Supply/Demand report on Tuesday. Average estimates are for a U.S. Soybean crop of 3.27 billion bushels, or about 20 million bushels higher than the October government estimate. Average yields are expected to have increased by 0.3 bushel per acre to 42.7 bushels per acre. If the predictions hold true, this would be the largest U.S. Soybean crop on record! In addition, Soybean production out of South America is also expected to increase this year. Record U.S. production is expected to replenish carry-out totals for the 2009-10 season, after falling to critical levels this past year. These bearish fundamentals have weighed on Soybean prices the past few weeks, sending January Beans below the 900.00 level briefly before wet weather in the Midwest kept many producers from being able to enter the fields to begin the harvest. This sparked a short-covering rally that has since stalled. Weather forecasts are now calling for warmer and drier weather the next several days, which should allow ample time for harvesting. If there is one bright spot in this seemingly bearish outlook for Soybean prices in 2010 it is that exports remain robust. On Friday, the USDA announced that 356,000 metric tons of Soybeans were sold to China, and the demand outlook from Far East buyers looks promising, especially given the weakness in the U.S. Dollar. Total Soybean sales now stand at 66.1% of USDA forecasts for 2009-10, which is up over 20% from the 5-year average

Trading Ideas

Soybeans appear range-bound, at least until we get a clearer picture as to how large the U.S. Soybean crop really is. Harvest delays and less than ideal weather late in the growing season may force traders to have to wait until the January Crop report to actually know how large the crop actually is. One possible strategy to take advantage of a market that looks to be moving sideways for the near future could be to sell strangles. An example of this-type trade would be selling the January Soybean 1110 calls in conjunction with selling the January Soybean 850 puts. Both strikes are outside significant support and resistance levels on the daily charts, which if taken-out would negate the sideways chart pattern. With January Soybeans trading at 962.00 as of this writing, this strangle could be sold for 12 cent, or $600 per strangle. Given the potential unlimited risk involved in selling strangles, diligent risk management is crucial. In a scenario such as the above, a trader may choose to exit such a trade before expiration in December, if January Soybeans trade above 1100.00 or below 850.00.

Technicals

Looking at the daily chart for January Soybeans, we notice prices hovering right around both the 20 and 100-day moving averages. This is likely caused by neither bulls nor bears having the upper hand in the short-term, though a series of lower highs and slightly lower lows probably does give an edge to the bears. The 14-day RSI is in neutral to bearish territory, with a current reading of 45.36. Large and small speculators disagree as to the direction of Soybean prices, with large non-commercial traders net long 73,022 contracts and non-reportable traders net short 25,749 contracts, according to the October 30th Commitment of Traders report. Near-term support for January Soybeans is seen at 945.00, with resistance found at 1022.50.

Mike Zarembski, Senior Commodity Analyst

November 12, 2009

No Let-up

Fundamentals

Gold futures have shown no signs of a let-up, setting yet another record high yesterday on a weaker Dollar and central bank buying. Central banks have shown an interest in diversifying their holdings from currencies to hard assets, as evidenced by India's large purchases. Sri Lanka has been a buyer of Gold, and Vietnam is allowing imports of Gold for the first time in over a year to curb rampant speculation domestically. These purchases may fill some of the void created by the lack of jewelry and industrial demand for the yellow metal. The Dollar Index continues to fall, despite hopes that the stronger GDP number would take some of the selling pressure off the greenback. In general, investors have been looking to limit their currency exposure due to the liquidity pumped into the global economy by central banks. It looks as though the Fed, European Central Bank and Bank of England will maintain low interest rates for the foreseeable future. A major concern of many analysts is that central banks will not easily be able to raise rates to decrease liquidity without disrupting the economic recovery, making traders question the value of paper money. As a result, commodity prices will likely continue to rise, thus making Gold appealing to investors. The fact that prices have risen as quickly as they have may, however, subject the precious metal to selling pressure from profit-takers. Also, traders may be reluctant to buy at current prices, hoping instead for a pullback.

Trading Ideas

Gold fundamentals and technicals appear to be solidly favoring the bull camp at the moment. While the near-term technicals can turn at any moment, there would have to be a number of factors that would need to dramatically reverse course for the fundamental outlook to change. These include changes in central bank policy, a downturn in economic activity, and the Dollar strengthening. While everything does seem to favor Gold, traders need to question whether they wish to enter the market at these price levels. Some long-term traders may wish to take a patient approach and consider buying the December contract if and when prices pull back to the 1075 level, possibly with a protective stop at 1045 and an upside target of 1135. This trade risks approximately $3,000 for a potential profit of $6,000.

Technicals

The December Gold chart shows prices rising at an extremely sharp clip after breaking out above resistance at 1070. Holders of long positions will likely feel better about their positions if prices come back down to test -- and ultimately hold at this newly established support at 1070. The Gold chart has gotten a bit parabolic, and without a healthy correction, the market risks a significant technical breakdown down the road. At the present moment, the Gold chart does not show signs of an imminent reversal. The RSI is now at overbought levels, as are the slow stochastics, indicating that the December contract may face some profit-taking pressure. Momentum is also lagging behind the price and RSI, also indicting the market may face some selling pressure in the near future.

Rob Kurzatkowski, Senior Commodity Analyst

November 16, 2009

Can Bears Take the Football and Run with It?

Fundamentals

Crude Oil futures are higher this morning, reversing some of last week's sharp declines. Japan's economy grew at an annual pace of 4.8%, exceeding even the most optimistic of expectations. The US Dollar is also continuing its slide this morning, giving Oil bulls a bit of good news to latch on to. The upbeat news from Japan indicates that the economic recovery is stretching the entire globe. Yet, despite this good news, traders have to question how much of this recovery has been the product of government intervention. Like the US, much of the world is seeing what can be termed a jobless recovery, where the gains in GDP can be seen as superficial. This suggests that conditions could deteriorate quickly if government aid is pulled too quickly. Traders also have to question when consumers will begin to open their pocketbooks and begin spending at a rate at which we are accustomed to seeing. This may happen later rather than sooner. This presents a quagmire for Crude Oil traders. The large US inventory levels reported last week may not be brought down unless the employment picture improves. On the flipside, continued government intervention is creating an unsustainable level of liquidity, which will likely limit the downside for Crude Oil.

Trading Ideas

Crude Oil fundamentals seem to be favoring the bear camp, as are the technicals. Crude Oil traders, however, are a very fickle bunch, so this can change at any time. Some traders may wish to stay on the sidelines for the moment and wait for further technical confirmation from several solid closes below the 75.00 level before testing the short side of the market. If the market is not able to cross this level, the market may trade sideways, thus making a more neutral strategy more appealing.

Technicals

The December Crude Oil chart shows price breaking down below near-term support near 76.50. However, prices did manage to snap back fairly quickly this morning. Could this be yet another false breakout? The price action this week will likely provide an answer for this question. The December contract is now flirting with an area of very heavy congestion that will either provide support or offer confirmation of a significant downside breakout.

Rob Kurzatkowski, Senior Commodity Analyst

November 17, 2009

Traders Await Their Next Sugar Rush

Fundamentals

Sugar futures have been a dream market for swing traders the past several months, as prices with both bullish and bearish short-term moves have become a regular occurrence. It appears that the recent price action is part of a larger price consolidation pattern that is occurring, after a nearly year-long bull market. Fundamentally, the market still looks bullish, as world supplies remain tight, and the International Sugar Organization expects the world stocks-to-usage ratio to fall to 32%, down 5% from last year, as production deficits spill into next year. India, the world's largest Sugar consumer, is not expected to limit Sugar imports, which is deemed supportive to the market. However, with Sugar prices more than doubling since October of 2008, it should come as no surprise that a much needed correction was overdue. Since the recent highs were made back in September at 26.25 in the March futures, prices have fallen nearly 20%, as large speculative trend-following accounts began to lighten-up on their long positions. According to the most recent Commitment of Traders report, large non-commercial traders shed nearly 25,000 contracts of their net-long positions in Sugar during the week ending November 9th, to now stand at 136,406 contracts. The sideways to slightly lower near-term price trend is not what these trend-following traders want to see, so funds are moved out of the Sugar market and into markets where established trends are still in force, such as Gold or currencies. Ultimately, this could be beneficial for traders awaiting a breakout in the Sugar market, as once prices move out of the recent price range, fresh interest from trend-following accounts should make its way back into Sugar and allow those holding positions to take advantage of such a move to, hopefully, reap the rewards for their patience.

Trading Ideas

Since Early September, March 2010 Sugar has been trading in a 5-cent trading range. Prices are now currently near the middle of this price range, with lower highs and higher lows being made. Traders expecting a breakout of the recent price range who are not sure in which direction the breakout will occur may wish to investigate purchasing strangles in Sugar options. An example of this type of trade would be buying the January Sugar 24.50 calls and the January Sugar 21.50 puts. With March Sugar futures trading at 23.24 as of this writing, this strangle could be purchased for about 0.90, or $1,008 per strangle, not including commissions. The premium paid is the maximum potential loss on the trade, with a profit at expiration in December, should the March futures be trading above 25.40 or below 20.60.

Technicals

Looking at the daily chart for March 2010 Sugar, we notice prices have been trading in a much narrower range the past few weeks. Prices continue to hover on both sides of the 20-day moving average, but seem to be holding above the longer-term 100-day moving average, which would favor the long side of the market. The 14-day RSI has turned up, but is still in neutral territory with a current reading of 52.32. The next resistance level is seen at 24.00, with support found at 21.78.

Mike Zarembski, Senior Commodity Analyst

November 18, 2009

Stronger at the Dollar's Expense

Fundamentals

The Euro is higher ahead of this morning's housing starts number, which may provide a boost for equities. The pan-European currency has found itself the beneficiary of traders shunning the lower yielding reserve currencies - the Yen and Dollar. Investors have become more vocal with their concerns about swelling budget deficits and elevated levels of liquidity as a result of government interventionism. Now that economic conditions around the globe have shown significant signs of improvement, world leaders are currently faced with the problem of attempting to extract some of the liquidity, without completely pulling the rug out from underneath their respective economies. Logic and history would tell us that leaders will likely err on the side of continuing aid and running deficits, rather than being fiscally responsible, to keep their constituents content. Politicians quickly forgot about the Nasdaq, housing, and commodity bubbles that were created by keeping liquidity too high for too long. The European Central Bank has, in its brief history, shown itself to be more hawkish than the Fed, which makes it the odds-on favorite to raise rates sooner and more aggressively than the US central bank. This will likely lead to the Dollar finding itself on the short side of the carry trade for the foreseeable future. The continued strength of equity markets also bodes well for the Euro, as the increased risk-taking by investors suggests traders will avoid US Bonds and Dollars.

Trading Ideas

The fundamental outlook for the Euro continues to appear to favor the bull camp, but the technical picture remains a question mark. It is difficult to imagine the Euro losing ground to the greenback, as traders cannot find a good reason to go long the Dollar. Any Dollar rallies would suggest that currency traders are covering shorts rather than actually going long. Because the technical picture remains unclear, some traders may wish to wait for a bullish technical breakout in the form of a solid close above the 1.5034 level before entering into a long futures contract. If traders do choose to go long at or above 1.5034, they may possibly wish to work a sell-stop at 1.4925 to protect their downside, with also a profit-target limit at 1.5300. This trade risks roughly $1,362.50 for a potential profit in the neighborhood of $3,325.

Technicals

Turning to the chart, the December Euro seems initially reluctant to cross through 1.5000. Prices would have to cross this level to maintain their upward momentum. If the Euro is unable to break through, the chart begins to look much more toppy in the near to intermediate-term, with a close below 1.4675 signally a double-top formation. Prices have been hovering near the 20-day moving average. A close below the average suggests that a near-term top may be in place. The oscillators are giving neutral readings, with the RSI at 55 and momentum clinging to the zero line.

Rob Kurzatkowski, Senior Commodity Analyst

November 19, 2009

Wheat Playing Catch-Up as Commodities Rally

Fundamentals

"Every dog has its day" is a fitting saying to describe the recent rally in the Soft Red Winter Wheat futures ("SRW") traded in Chicago. March Wheat has rallied to highs not seen since July, as the continued battering of the U.S. Dollar has commodity funds in a buying mood for anything "commodity", Wheat included. Fundamentally, the recent rally seems suspect, given ample world Wheat supplies. In addition, Wheat exports have not been stellar, despite a lower greenback. If there is any "bullish" news behind the recent rally, it would be planting delays seen in the eastern parts of the Midwest due to a slow start of the Soybean harvest, as wet weather has kept producers out of the fields. Many producers will plant Winter Wheat as a double crop after the Soybean harvest is complete. However, producers have begun to catch-up on their Wheat plantings, although private weather forecasters are calling for continued cool, wet weather into next week. Large speculative accounts have been holding a net-short position in SRW futures, and some traders believe that short-covering buying has been behind the recent rally. The most recent Commitment of Traders report shows that large non-commercial traders were holding a net-short position of 8,730 contracts as of November 9th. This was down by 1,894 contracts for the week, and adds credence to the theory that the rally is due to short-covering. With prices nearing $6 per bushel in the March futures, we may start to see producers begin to sell Wheat into the market from storage, in order to take advantage of recent price gains. If this occurs, Wheat bulls may find it difficult to keep prices moving higher as hedge selling emerges.

Trading Ideas

Given the suspect nature of the recent Wheat rally, some traders may wish to investigate bearish option strategies to take advantage of a potential correction in the market. More conservative traders may want to consider bearish put spreads, such as buying a March Wheat 570 put and selling a March Wheat 520 put. With March Wheat futures trading at 597.50 as of this writing, the spread could be purchased for 19.50 cents, or $975 per spread, not including commissions. The premium paid is the maximum potential loss on the trade, with a potential profit of $2500 minus the premium paid should March Wheat be trading below 520.00 at option expiration in February.

Technicals

Looking at the daily chart for March Wheat, we notice prices have just made a 50% Fibonacci retracement from the June 1st highs of 739.75 to the October 2nd lows of 459.00. Prices are now above both the 20 and 100-day moving averages, which is usually viewed as a bullish indicator. The 14-day RSI has just moved into overbought territory, with a current reading of 70.20. However, we may be seeing the start of a bearish divergence forming in the RSI, which could be signaling that the recent rally is beginning to look tired. The next resistance point for March Wheat is seen at 632.50, with support found at the recent lows near the 516.50 area.

Mike Zarembski, Senior Commodity Analyst

November 23, 2009

Is Sterling About to Get Pounded?

Fundamentals

They used to say that the sun never sets on the British Empire, as Great Britain was the dominant economic power in the world prior to World War II. Now, however, the Pound Sterling has fallen on hard times, as traders fear record budget deficits and continued policies of low interest rates will weigh heavily on the nation's currency. On Thursday, it was announced that Britain ran a budget deficit of 11.4 billion Pounds in October, which was the largest monthly deficit since records began in 1993. The recent recession has hit Britain hard, sending unemployment rates soaring. The Bank of England, taking its cue from the U.S Federal Reserve, embarked on its own quantitative easing policy in order to provide stimulus to its struggling economy. In addition, the Bank of England (BOE) has lowered it key interest rate to 0.5%. This low interest rate is not expected to be increased any time soon, despite some glimmers of economic improvements in the world economy. On Thursday, the Organization for Economic Cooperation and Development (OECD) in its Economic Outlook does not expect significant improvements in employment and resource utilization until 2011, at which time the OECD expects the BOE to begin to ease its accommodative interest rate policy. Since it appears that the BOE will not be raising rates anytime soon, traders may begin to look towards the Pound as another funding currency for so called "carry-trades." In a "carry-trade", a trader will borrow (sell) a low interest rate currency such as the Japanese Yen, U.S. Dollar -- and now the British Pound -- and invest (buy) a higher rate currency, such as the Australian Dollar or Brazilian Real. If economic growth rates in Great Britain continue to lag behind those of other OECD countries, then there is a good chance that traders will continue to add to "carry-trades" vs. the Pound, and keep steady selling pressure on the currency for some time to come.

Trading Ideas

Currencies are notorious for large overnight moves, especially when economic reports are released. Although the fundamentals do seem to favor continued pressure on the British Pound, it may be difficult for some traders to hold positions through periods of large price moves. Utilizing long option strategies on British Pound futures options is one way traders can help define their risk while being able to hold a position through volatile trading conditions. One such trade is buying bear put spreads in the British Pound. An example of this type of trade is buying the January 1.63 puts and selling the January 1.56 puts. With March British Pounds trading at 1.6510 as of this writing, the put spread could be purchased for 1.63 points, or $1,018.75, not including commissions. The premium paid is the maximum risk on the trade, with a potential profit of $4,375 minus the premium paid should March Pounds be trading below 1.5600 at option expiration in January.

Technicals

Looking at a daily continuation chart for British Pound futures, we notice prices have moved into a rather large consolidation pattern (13 full points) since the beginning of June. The recent rally attempt to test resistance near the 1.7050 area was met with fresh selling, and the December futures were unable to trade even above 1.6900. The 20 and 100-day moving averages are starting to converge near the current market price, which is a hallmark of a market that continues to be range bound. The 14-day RSI has moved into neutral territory, with a current reading of 50.00. Major support is found at the lows of the recent consolidation near 1.5700, with resistance seen at the recent highs near 1.7050.

Mike Zarembski, Senior Commodity Analyst

November 24, 2009

Will Copper Continue to Shine in '09?

Fundamentals

Copper futures have been trading sideways for the past few sessions, after firmly establishing a base above the $3 level. The Copper market continues to rally, in spite of increasing inventory levels. LME stockpiles of the base metal have increased for three weeks. There has been much discussion regarding China's future purchases. On one hand, Copper users in China have been aggressively stockpiling the metal over the past few months, leading to more than ample inventory levels, which could inhibit price growth. On the flip side, China's insatiable appetite for commodities is expected to increase in 2010, as economic conditions continue to improve. At this point, it seems that forward-looking traders who are optimistic about China's growth and Dollar bears are the driving force behind the current rally. Copper could find itself facing significant selling pressure if the Dollar is able to strengthen, which is not very likely at this point. There is a large amount of economic data being released today and tomorrow, which may cause an increase in volatility. Of particular importance for Copper traders will be the housing value index data today and new home sales tomorrow. As far as the economy as a whole, traders will be mindful of today's GDP revision and consumer confidence number heading into Black Friday.

Trading Ideas

Copper fundamentals do seem to favor the bull camp, as traders have been extremely bullish on China and Copper has been an indirect way to benefit from growth in the Asian giant. Downside risks remain, however, as evidenced by the stockpiling by China, which could result in a slower rate of imports and downward pressure on prices in the near-term. Some traders may wish to wait and see how Copper behaves if and when prices pull back to the 3.05-3.06 level. If the market is able to hold support here, some traders may possibly wish to enter into a long futures position in the March contract, with an upside objective of 3.25 and a stop at 2.95. The trade risks roughly $2,500 for a potential profit of $5,000.

Technicals

The March Copper chart shows prices breaking out of a wedge formation on the daily chart. The measure of the wedge suggests prices may test the 3.25 level. The sideways trading over the past week following the breakout of the wedge pattern suggests that traders are taking a pause and taking some profits off the table. The stochastic indicators are getting a bit overbought at the moment, suggesting this consolidation may continue in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst