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April 24, 2008

Dollar Intervention

Just a quick thought on the recent bashing being taken by commodities, particularly precious metals. At the conclusion of last week's G7 meeting, the ministers all came out expressing concern about the dollar weakness and stating how the US needed to do something about it. The next couple days after their statement, the dollar continued to slide. Then one of the ministers (I don't remember which one) stated that obviously the market didn't believe them about the dollar.

Well now we have the dollar bouncing strongly right at a crucial technical point, and one which projected the dollar to slide another 5%. My guess is that we have had some central bank coordination to support the dollar. This intervention has had the effect of squeezing some dollar shorts... hence the strong bounce... and forcing hedge funds, which mostly set correlational portfolios, to unwind corresponding commodity longs.

If this read is accurate, it would explain why so many commodities recently failed on breakouts. It would also give us a chance to gauge which commodities are fundamentally strongest, i.e. which ones have held up pretty well in the face of a 2% rally in the dollar. The two that I notice immediately are natural gas and copper. Perhaps we should keep an eye on Gary's COT reports and be prepared to take longs in these commodities when the dollar completes its correction.


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