Commodities seem certain to rise this week, analysts say, as the impact of a disappointing injection of cash from the Federal Reserve would be more than offset by increasingly upbeat fundamental factors.
Commodity and forex markets expectations range from $250 billion to $2 trillion of bond purchases by the Fed in a second round of quantitative easing. Traders are bracing for a quick rise in the dollar — and commensurate fall in commodities — if the Fed takes a less aggressive approach.
The dollar has lost about 7 percent against a basket of currencies over the past two months on speculation that the Fed will commence so-called QE2, as signaled by Chairman Ben Bernanke on Aug 27.
A knee-jerk bounce in the dollar could weigh on prices, though. The 19-commodity Reuters-Jefferies CRB index has jumped 14 percent since Aug 27 as the weaker dollar made commodities priced in dollars cheaper for investors holding other currencies. A weak dollar also boosts inflation.
After the Federal Reserve voted to implement its first round of quantitative easing in late 2008, the CRB fell 8 percent by February.
But that was right after the collapse of Lehman Brothers, which triggered global financial panic. In the ensuing months, the CRB rose and finished 2009 up 23 percent.
However commodities react to the Fed on Wednesday, focus is likely to return by the end of the week to core supply-demand factors that have been largely bullish over the last quarter.
If the Fed eases less aggressively than expected, oil, metals and grains prices could fall. Even so, markets such as cotton, sugar, coffee and cocoa prices may show muted impact due to bullish crop, supply and demand conditions now.
Analysts views on the implications for key commodities:
The dollar could rebound if the Fed signals it will buy fewer bonds than some expect, potentially pushing the euro down to about $1.39 from about $1.40 now, traders said.
BORIS SCHLOSSBERG, DIRECTOR OF FX RESEARCH AT GFT IN NEW YORK:
"If the Fed surprises to the downside, the knee-jerk reaction in euro/dollar would be a full figure drop because much of the outcome has already been priced in."
"The more likely expression though is in dollar/yen. If the Fed is not dilutive as the market expects, then that would put a little bit of upward pressure in Treasury yields, which would be supportive of dollar/yen.
So a dollar-positive surprise would push (the) dollar a full yen higher."
Oil prices have risen 12 percent since Aug. 27.
If the Fed's signaled bond purchases are modest, analysts expect crude oil to fall to or slightly below $80 per barrel, from above $83 on Tuesday — the bottom of the trading range that's been in place since early October.
If the Fed's purchases are heftier, weighing on the dollar, oil could rise above $85 per barrel, the top of that range.
MARK WAGGONER, PRESIDENT OF EXCEL FUTURES, IN BEND, OREGON:
"There are two scenarios that could develop based on how much quantitative easing the Federal Reserve will announce. If it chooses the low end of the speculated range, about $500 billion, and pledge(s) to raise that amount, in say, the next six months if needed, the dollar could mount a significant rally and oil prices could be pushed back."
"If the Fed opts for the higher end, which some polls say could be $1 trillion to as much as $2 trillion, then that could pull down the dollar and oil could burst above $85 a barrel."
PETER BEUTEL, PRESIDENT AT CAMERON HANOVER IN NEW CANAAN, CONNECTICUT:
"Will we see a correction? Almost certainly we will. But it will almost certainly be a shallow one and it will not last very long. You have support at $79.25 to $80.50."
Spot gold has gained nearly 10 percent since August 27 and is now trading above $1,350 an ounce. The yellow metal could trade about $20 lower or $30 higher, depending on how aggressive the quantitative easing steps are.
JAMES DAILEY, PORTFOLIO MANAGER OF THE TEAM ASSET STRATEGY FUND:
"Gold is increasingly vulnerable to a pretty significant correction" in the short term.
"(There is) too much hot money in gold. Too bullish. Everyone already knowing that there is going to be QE2. Regardless of the scope of what the Fed announces, it's going to likely result in the dollar rallying...and gold getting caught up in that."
FRANK MCGHEE, HEAD PRECIOUS METALS TRADER AT INTEGRATED BROKERAGE SERVICES IN CHICAGO:
"We could see gold $25 to $30 higher than we are now, if not $15 to $20 lower if we do not see actual open market signs that the Fed has started the QE2."
U.S. copper, currently above $3.80 per pound, could revisit the historic $4.00 level it hit in May 2008 if the Fed acts more aggressively to stimulate the economy.
If the quantitative easing is modest, prices could slip about 6 percent, but are likely to hold support given the market's tight supply-demand balance.
FRANK LESH, BROKER AND FUTURES ANALYST WITH FUTURE PATH TRADING IN CHICAGO:
"With the right news, I think copper wants to trade back to $4.00 (per lb). Initially, a lot of free money would buoy prices. The more free money, the better."
"We have definitely priced in the minimum, if not more. Support in the market right now is in the $3.60's ... $3.68 to $3.62."
"We may come off on a little disappointment over not enough free money as expected, but even if it sets back, it just means we'll be buying the dip instead of buying the breakout."
ZACHARY OXMAN, MANAGING DIRECTOR WITH TRENDMAX FUTURES IN ENCINITAS, CALIFORNIA:
"If they go smaller-than-expected with QE, I really do not think there is too much downside out there. The bottom line is that there is still a lot of demand out there for industrial and precious metals, and it seems we are turning the corner in terms of the economy, so I do see some downside if they come in smaller, but I think the risks are based to an upside move."
Oxman sees support at $3.50 to $3.60.
Corn could end the week at $5.50 per bushel, compared with $5.75 now and $4.24 at end-August, forecasters said.
Soybeans could fall to $12.15 from above $12.20 now and around $10 two months ago. Wheat could slip to $6.75, versus current levels of nearly $6.95 and about $6.52 at end-August.
FRANK CHOLLY, SENIOR MARKET STRATEGIST, LIND-WALDOCK:
"I think it is going to be an incremental type of quantitative easing. The market might be disappointed and the dollar I think would bounce off of that kind of news. That could put some pressure on the grains."
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