Punishment for commodities

Ahead of the beginning of Janet Yellen’s two-day testimony to Congress where the Federal Reserve Chairwoman will be heavily quizzed regarding the timing of a US interest rate rise, the USD is racing ahead of its counterparts. This is occurring despite the FOMC Minutes release just a few days ago stressing that the Federal Open Market Committee will be in no hurry to begin raising US interest rates, meaning that the USD bulls are clearly hoping Janet Yellen will refuse to rule out a summer rate rise after all.

Aside from the hopes for a possible hawkish comment from Janet Yellen, the other reason for the stronger USD demand is also probably linked to the complete divergence in economic sentiment and monetary policy between the United States and everywhere else to be honest.

We have been aware since the summer months of last year that 2015 would be the year that the complete divergence in economic sentiment from economies still struggling to make progress and monetary policy between central banks beginning to normalize monetary policy would confront traders, but so far all we have seen is central banks easing monetary policy left, right and centre. It was never in the plan that so many central banks would ease policy  and although it is mostly in direct response to the falling oil prices, it has further stretched the divergence in sentiment from the US and everywhere else even further than we were already anticipating. Expectations are still strong for the FOMC to raise rates in the second half of the year and Janet Yellen needs to calmly reiterate that over the next two days, otherwise we are going to get an even stronger dose of market volatility.

The stronger USD demand sent commodities for a round of punishment to begin the week. The likes of Gold and Silver plunged to seven-week lows while WTI Crude dropped to its weakest level since the beginning of the month. It was the losses in WTI Crude that caught the eye with the commodity losing $4 in the past two days to drop to $48.66. This then had a knock-on impact on the currency markets with currencies linked to commodity prices declining in sync with the punishment handed to the oil markets. Therefore the Russian Ruble, Canadian Dollar, Norwegian Kroner and Australian Dollar all suffered losses.

A consolidation range between $55 and $48 for WTI Crude is appearing to take shape and settle on the H4 timeframes, although this is still tentative and the commodity appears to be vulnerable to dropping below the lower range as the European session commences today. The reason for the bearish momentum is basically because the economic outlook for the oil markets is still bleak, where supply levels still far outstretch demand. The resumption of supply from Libya’s oil field has added to this but regardless of another drop in US oil rigs, the markets are fully aware US inventories have reached record levels. WTI bulls require lower rig counts to result in less production otherwise the oil markets will be subject to repeated pullbacks, which we are noticing on a regular basis.

In regards to Gold and Silver and as mentioned above, both metals declined to seven-week lows as traders decided to purchase the USD before Yellen’s testimony begins later on Tuesday. Gold dropped to $1190 while Silver extended as low as $16.08. Traders have once again decided to price in moves early, with the same thing occurring before the FOMC Minutes release last week. However, I am refusing to rule out further volatility in metals because if Janet Yellen repeats that the FOMC will not be rushing to raise interest rates, we could be in for a sudden momentum shift. This also occurred last week but it does appear that any potential USD weakness is a temporary thing and will remain so, unless the FOMC awakens the bears by back-tracking on its commitment to raising interest rates at all this year.

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