Demand for Commodities Falls as Dollar Strengthens

James Hyerczyk from ForexHound.com at 01/07/10

The U.S. Dollar erased early overnight losses and is now trading higher after China shocked the Forex markets with a surprise hike in interest rates. China’s move to curb excessive lending and curtail price increases drove traders into lower yielding, safe haven currencies.  China’s central bank sold 3-month bills at a higher interest rate for the first time in 19 weeks.  This news is expected to put pressure on commodity and stock prices today.

This morning’s key report is the U.S. Weekly Initial Claims Report.  This is the second of three job related reports this week. Last week’s report showed initial claims at 432K. Economists have pegged this week’s range at 420 to 470K with the consensus at 450K.

Equity markets are under pressure because of the news from China.  Commodity related stocks are putting the most pressure on stock prices.  In addition, institutional and mutual funds are expected to remain absent ahead of tomorrow’s U.S. Non-Farm Payrolls Report.

Treasury futures are trading lower but inside of their recent ranges.  Trading is expected to be light ahead of tomorrow’s employment report.  The current range for March Treasury Bonds is 114’16 to 116’05.  March Treasury Notes have fallen into a range between 114’28 to 116’08.

February Gold is under pressure overnight because of the stronger Dollar. The current chart formation suggests a possible pull-back to $1108.10 - $1100.34.  Downside momentum will depend on how strong the Dollar gets.  The main trend is still up, however, with $1151.30 a key objective.  The overnight weakness is profit-taking and is not expected to lead to a change in trend unless the Dollar Index breaks out over 78.45.

March Crude Oil could be under pressure as traders are dumping commodity related contracts because of the rate hike in China.  By raising interest rates, China hopes to curtail excessive lending practices and cool off the economy.  Traders expect a drop in demand for crude oil, leading to the overnight weakness. Technically, this market is vulnerable to the downside with potential targets at 78.80 and 77.56.

Support continues to erode for the March British Pound as this market remains top heavy. Overnight selling pressure took out weak longs who were trying to establish support at a retracement zone at 1.6036 to 1.5988. If selling pressure continues, the most obvious downside objective is the recent bottom at 1.5825.

This morning, the Bank of England is expected to leave interest rates at 0.50% while leaving its asset purchase program intact.  The surprise would be a change in its quantitative easing program.  

Trumping the BoE meeting is the heated debate over the budget deficit.  Prime Minister Gordon Brown and Conservative opposition leader David Cameron are currently engaged in a heated discussion on how to handle the growing budget difficulties.

The March Euro weakened overnight as demand for higher risk assets dropped following the rate hike in China.  At this time, the Euro is stuck in a range between 1.4215 and 1.4483.  Prices are currently hugging the retracement zone of this range at 1.4350 to 1.4319.

Bearish comments from the new Japanese Finance Minister helped trigger a break in the March Japanese Yen.  Overnight Naoto Kan said he wanted to see a weaker Yen.  This announcement is leading traders to believe Japan may be more inclined to stem any sharp rise in its currency.  Kan feels that his job will be to keep the Yen at an “appropriate level”.  His job will be to keep up interest in Japanese exports.

Technically, the March Japanese Yen should remain weak as long as the downtrending Gann angle at 1.0718 remains intact.  Based on the main range of .9876 to 1.1774, traders should look for a retracement to 1.0825 to 1.0601 over the near term.

The stronger Dollar is helping to pressure the Swiss Franc. Current price action suggests the formation of a daily closing price reversal top in the March Swiss Franc.  Based on the short-term range of .9522 to .9768, traders should look for a minimum retracement to .9640 - .9612.

The March Canadian Dollar is weakening ahead of the U.S. opening.  The current chart set-up suggests a possible closing price reversal top at .9716.  The first downside objective is .9571.  Weaker gold and crude oil prices could trigger an acceleration to the downside.