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The Commodity Trend Is Your Friend
Last week we saw massive reversals in the two hot commodity markets, gold and oil, as the leverage hedge fund community unloaded massive long positions to book profits as global risk aversion increased. Spot gold put in a $1032/oz high before shedding over $125/oz into the end of the week. NYMEX crude put in a similar ‘slide’ from $111.80/bbl down to $98.65/bbl. Now because the commodity markets are a natural hedge against the falling value of the USD, rapidly falling commodity prices sent the dollar shorts running for cover sending the USD higher against the G-7. At the start of this week, many traders were expecting this theme to carry into this week. But it’s amazing how quickly the old adage ‘the trend is your friend’ is forgotten by the markets. Starting Sunday night we were in mostly a holding pattern until the underlying themes began to reassert themselves later into the week.

Is Anybody Home?
Monday morning saw an unexpected 2.9% increase in February’s Existing Home Sales numbers after 6 consecutive monthly declines. The markets took it to heart as the S&P broke the 14-day 1342 resistance level to print the intra-week high on opening trading session. But Tuesday morning’s Case Shiller Index brought the bottom-fishing real estate bulls back to earth by printing a 10.7% Year over year decline; the biggest decline on record. The very next day February’s New Home Sale saw 578k New Home Sales sold, just below the 590 expected with a 588k prior for January. The most interesting part of this report was the inventory of unsold homes is the highest since 1981. After Monday’s 1359 high in the S&P, it was a steady stair step lower for the rest of the week. The bloated inventory of unsold homes combined with depressed consumer confidence is very likely to sustain this economic downturn for sometime to come.

Singing The Blues or Show Tunes?
Speaking of Consumer Confidence, Tuesday morning’s reading of 64.5 handily missed the surveyed expectations of 73.5 with a prior reading of 76.4. 64.5 is the lowest reading of Consumer Confidence since March of 2004. To further confirm that the US consumer has the blues, today’s University of Michigan Confidence report printed the lowest reading in over 8 years! The reading was expected to come in at 70.00 with a prior reading of 70.5, but also missed the mark by a half point at 69.5.

While the US consumer is signing the blues, we found out that for the 3rd month in a row the Euro Zone business owner is singing show tunes. If you recall last February’s IFO reading of 104.1 that beat the expectations of 102.9, you might remember EURUSD breaking free from significant 1.4950 resistance to trade 1.5000 for the first time ever in the product’s history. On Wednesday we got the March IFO Business Climate index that again beat the 103.5 survey with a 104.8 reading. And again, EURSUD caught a huge bid to approach the 1.5905 March 17th highs, but failed at 1.5858.

The major theme of the week is that while the Fed is focused on easing monetary policy and preventing further effects of the credit crisis in the financial markets, the ECB is more focused on pricing stability and inflation concerns. On Wednesday Jean Claude Trichet noted fundamentals are “sound” while the labor markets remains strong. EURUSD will do well against the low yielders such as the USD and CHF on higher risk appetite, but faces downside risk from hedge funds de-leveraging out of commodities should global markets shown further signs of slowing as a result of the US sub-prime meltdown.

Once we hit the mid-point of last week, we began to see that the outlook for the global economy is still positive as the underlying themes I mentioned in the first paragraph began to take hold. Gold and Oil slid into Monday’s session as a result of carry over from weakness seen last week, but quickly regained footing at the 50% retracement in oil after clearing stops blew $100/bbl and the 61.8% retracement in spot Gold. Crude dealt to a weekly high of $108.22/bbl today as Gold set in a $954/oz on Thursday. In response to firming commodity prices Australian and Canadian Dollars were both strong against the USD and will look for this theme to continue into next week.

Risk aversion has been driving the Yen higher as those who have borrowed cheap Yen to fund speculative positions in global markets area closing those positions. But now, there might be actual value seekers flowing into Tokyo after Thursday’s CPI showed inflationary pressures most likely as a result of increasing energy costs for the highly oil-dependant nation. Lastly, Japan’s fiscal year is coming to a close as local investors repatriate Yen back home to close outstanding positions.