The big news on the morning – that China had ended a two-year stint fixed rate regime – would not go unnoticed by oil traders. From a speculative perspective, this announcement was interpreted as a sign that capital markets should roar ahead; and for the fundamentally inclined, the news could be understood to mean the global economy would be able to put in for a more balanced economic economy.North American Commodity Update
Commodities - Energy
Crude Squanders Early Rally on News China Had Dropped its Peg
Crude Oil (LS NYMEX) - $77.32 // $0.14 // 0.18%
The big news on the morning – that China had ended a two-year stint fixed rate regime – would not go unnoticed by oil traders. From a speculative perspective, this announcement was interpreted as a sign that capital markets should roar ahead; and for the fundamentally inclined, the news could be understood to mean the global economy would be able to put in for a more balanced economic economy. Yet, neither of these considerations would ultimately result in a lasting bullish assistance for the commodity. Following the opening gap for the futures market, the active NYMEX crude contract was spurred on to its biggest advance in six weeks before it ultimately all of the active session gains. It should be noted that tomorrow is the last trading day for the July 2010 crude contract. That being said, aggregate volume for the market dropped to its lowest level since March 30th (459,259 contracts) this past Friday as open interest plunged to its lowest level since March 1st (1.283 million contracts).
Looking at the fundamental activity through the session, there was very little on the economic docket through the opening 24 hours of the trading week. That wouldn’t end up being a problem for volatility development given the response to the People’s Bank of China’s announcement that the country was abandoning its fixed exchange rate regime against the benchmark dollar. The implications for this development are potentially remarkable; but much of it is simply speculative at this point. For those using crude as an trading asset, China’s liberal turn would seem a sign that the globe’s top investment destination is performing better than many had thought. Furthermore, this move could balance political tensions ahead of this weekend’s G20 with those officials claiming China was holding its currency artificially low in orders to stoke exports. However, from a supply-and-demand perspective, a move from a fixed exchange rate to a closely managed regime gives the impression that the world’s recovery will be better balanced with some industrialized nations finding themselves on a more competitive footing while the world’s second largest economy boosts its own consumption habits. Yet, these after effects will come much later; and the controlled nature of the FX policy will not allow for dramatic changes when they are needed the most.
Looking ahead to tomorrow, there will no doubt be echoes from the China announcement; but fundamental interests will be able to tune back into the calendar for defined macroeconomic events. The German IFO business confidence survey will be particularly important for energy traders; but US existing home sales and Euro Zone consumer confidence will be worth analyzing for growth expectations. At least, with the difference between the active NYMEX futures contract and the two-year deferred contracting to $7.78, we can see through the immediate volatility of today’s session an improvement in the market’s outlook.
Commodities - Metals
Failed Follow Through Followed by Sharp Tumble as Gold Suffers from Improved Sentiment then Dollar Strength
Spot Gold - $1,233.50 // -$23.30 // -1.85%
Just one trading day after gold put in for a dramatic technical breakout to a new record high, the metal has entered into a deep retracement. The spot market put in for its worst daily decline in just over a month Monday, dramatically changing the outlook for the market. Typically, after a meaningful break from congestion (and this was meaningful after developing a month-and-a-half long ascending triangle pattern), a fresh wave of investors are attracted to the market as the commodity makes headlines. Yet, it seems gold may have already saturated investors’ awareness and the sheer cost of the asset is leading to second thoughts.
For fundamental inspiration, the Chinese news was a particularly interesting announcement. Given gold traders’ preoccupation with sovereign credit risks, this particular headline would have a unique interpretation. What does a switch from a fixed exchange policy to a managed one mean for sovereign risks globally? This is a move that will ease global tensions arising from the call of currency manipulation which could further protectionist agendas that would further hurt international capital flow. What’s more, such a move is a sign that the world’s second largest economy is strong enough to take a step that could potentially invite greater volatility into the economy. This helps to offset building concern that China may be on pace to suffer a credit market collapse due to the overheated lending activities of the previous years – if only to distract from this very real problem for a short time. And, later in the US session when the speculative good will of the Chinese announcement was run through, the selling effort behind gold wouldn’t let up thanks to an impressive recovery for the US dollar – the primary alternative as its own safe haven.
It is interesting to note that open interest on the COMEX futures contract rose to an all-time high this past week. Yet, with today’s price action, it is interesting to note that the most active contract (the August 2010 expiry) would not see a particularly dramatic increase in volume. Furthermore, the CBOE Gold Volatility Index was little moved despite the significant drop in underlying price action.
Spot Silver - $18.75 // -$0.43 // -2.24%Silver’s efforts were limited at the get go. On the open of electronic trading, metal traders were encouraged by China’s news that policy officials had shifted tack on the currency exchange rate. The bolster this news offered investor sentiment was undeniable; but silver’s correlation to these moves would be muted by its links to gold. By the afternoon of the US session when risk appetite was on the retreat, the speculative commodity would find another negative drive in the former of the US dollar. That being said, volume on the active COMEX futures contract rose to a two week high as aggregate open interest sustained its march higher through the end of last week.
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