Friday, August 08, 2008

'Buck' the Trend

The reversal is nearing the most important pivot of 2008. Commodities has plunged down sharply. USD has turned sharply against all currencies and the trend is only getting stronger. The USD index is now inching closer to close above 74.8 mark and complete a reversal pattern filling up the exhaustion gap. Have a look at the graph-

The question is whether we are going to 77 in a hurry?
From a traders perspective it does look like a bottom in USD is in place for atleast next one year or so. The overall trend would be one of rising USD and falling energy and metal prices. 'US Federal Reserve is not going to raise rates anytime soon' this is the consensus of most of the market participants currently. However prices are telling a different story altogether. The Federal Reserve is expected to raise rates in September. This notion is actually against the market factoring in the expectation of a no change in Fed Funds rates. I feel smart money is now betting on an interest rate hike as commodities cool off. However Fed will surely have an upper hand in keeping rates at current levels as commodities cool off the the threat of inflation abates.

US data has been rather sticky in terms of inflation. The core inflation has been on the higher end and there is very little sign of slowdown in growth rate of inflation. The futures expectation of interest rates and the course of inflation is best predicted by gold prices. With gold prices cooling of it does seem that inflation is going to cool down over a period of next few months. As I wrote in my previous updates that the threat to gold prices is now very material and there is a big threat of prices declining below $800.

It is important to look what happened last year. Gold and silver formed an important bottom in the month of August to start a big upmove. Next month is an important seasonally strong month for precious metals and USD has given a strong rebound towards important levels.

EUR has suffered material damage and looks set to fall to 1.4600 against the USD in the spot markets.

JPY has broken down against the USD. JPY now targets 114 in the short term and 121 in the long term.

USD is now getting stronger and if dollar index traders above 75.6 for a week or so, we would see a dramatic sell off in commodities.

Next Market Mayhem post will be published in next two days.

Sahil Kapoor

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