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2010 Outlook for Currencies and Commodities
Wed, Dec 23 2009, 08:48 GMT
The key themes with respect to the currency markets for 2010 center around the United States dollar and include the response of the Federal Reserve to the largest economic crisis since the Great Depression and its potentially inflationary implications, the global appetite for risk and the US dollar “Carry Trade”, and the speculative “Bubbles” which have been or may be created from the increase in the money supply.
The dollar declined sharply from its peak in March of 2009. The dollar index sold off 17.24% of its value, moving from its high of 8962 to its low of 7417 in November. The primary factor in the dollar’s slide was the Federal Reserve’s easing of monetary policy which included lowering interest rates to near zero and qualitative easing to increase the supply of dollars in the economy. As a result of lowering US interest rates, investors pressured the dollar further by borrowing US dollars to invest in higher yielding vehicles including commodities including precious metals and higher interest rate bearing currencies such as the Australian dollar in what is referred to as the “Carry Trade”.
As 2009 is coming to an end, we are seeing the dollar rally due to a number of factors including a decline in the global “Appetite for risk”, signs that the US economy is improving and may be on the road to recovery, and end of year profit taking by commodity and hedge fund managers locking in gains on those markets that benefited from a weaker dollar in 2009.
As the Federal Reserve’s mandate is to keep prices stable and promote economic activity consistent with rising employment, the Fed indicated their intention is to remove some of the excess reserves it has injected to stimulate economic growth but is likely to maintain its target range for the federal funds rate at 0 to ¼% for an “Extended period” at the conclusion of its Federal Open Market Committee meeting in December. With most economists surveyed by Bloomberg news looking for the Fed to leave interest rates unchanged through the middle of 2010, downward pressure is likely to re-assert itself on the US dollar in 2010 once the global “Appetite for risk” increases.
Since its low of 7417 in late November, the dollar index has recovered 5.6% of the 17.24% it lost from its peak of 8962.4 in March and is approaching key resistance points highlighted in the chart below.
Conversely many of the currency markets have given back some of the gains they made against the US dollar in 2009. If the US dollar were to recover 50% of the value it lost since its peak in March, it would be at 81.89. Key retracement levels for selected currency markets are below, and could be useful as potential reversal points as we begin 2010.
38.2% 50% 61.8%
*USD/JPY data is based on a longer timeframe as the dollar has been losing value relative to the Japanese yen since the June of 2007.
Many of the commodity markets moved up significantly in 2009 as well, benefiting from a weaker US dollar. Retracement levels may prove to be good levels to buy into bull markets on a pullback in 2010.
For select commodity markets, these levels are in the table below, and could be useful as potential reversal points as we begin 2010.
38.2% 50% 61.8%