Forex Investment and Currency Trading

Commodity markets have corrected sharply lower as concerns over the scale of financial sector problems have intensified. The correction began on 13 March, but steepened on the 18 March, following disappointment in the magnitude of the Fed’s most recent rate cut, a rebound in the USD (which is believed to be temporary) and a general round of profit-taking to offset losses elsewhere. Also, the recovery in the US equity market in particular
appeared to attract funds away from commodities over the past week, indicating the growing links between these markets as investment in commodities as an asset class has increased.

This is viewed as a healthy correction and a timely reminder of the inherent volatility in commodity markets, and the inappropriateness of the term ’safe-haven’ in the context of longer term investor flows. Gold is often said to have safe haven characteristics, but such flows tend to be short-lived and dissipate over time. The surge in flows into the commodity markets since the beginning of the year had been overwhelming and largely indiscriminate, and a shake-out was overdue. However, the fundamentals for precious metals and agriculture are still compelling, due to rising inflation risks, a weakening USD and supply concerns. Industrial materials, however, are much more geared to the economic cycle and market continues to have a bearish outlook, particularly for H2 when the impact of the slowdown in the US economy on the rest of the world should become increasingly evident.

Resilience of the crude oil market

The crude oil market has stayed relatively resilient. While prices fell from all-time highs, WTI crude futures only briefly dipped below USD 100pb, and have since rebounded.

China’s GDP growth for Q1 has potential to shock market

Much of the continued optimism for commodity demand, particularly for metals, hinges on China. China’s GDP growth is expected to slow to 9.5% this year, from 11.4% in 2007. In particular, market is forecasting a Q1 GDP growth number of 10.5% y/y, which has the potential to shock a market accustomed to figures above 11% when it is released on 17 April. Q4 2007 was 11.2% y/y. This will likely prove to be a trigger for further correction in the base metals markets in particular. Recent metals production and trade data for China has been erratic and distorted by both the New Year holiday and unusually severe winter weather so it is difficult to get a clear view on demand, but the picture seems to be one of decelerating but still persistent demand growth.