Ralph Shell @ 10:53 AM, Wednesday December 29 2010
As we approach year end trading, according to convention wisdom, the volume is supposed to slow down to a thin volatile trade. Yes, there will be some big speculators, trying to enhance the value of their favorite positions, buying more at ever increasing prices or, if short, going the other way, but the trading volume is supposed to be light. Such was not the case at the CME currency futures market yesterday.
The total open interest of the six currencies we follow, the A$, pound, C$, SF, euro, and the yen and the yen was up over 37,000 contracts in one day. This is a large single day increase in the open trade. Granted the cash trade is probably much larger than the futures but that total is not visible. The sharpest increase in the OI was in the Canadian Dollar, going up 14,279 futures contracts, for about a 14% increase for one day.
The C$ has been trading at parity with the USD this week, propelled by the year end infatuation with commodities. Sure the higher prices of oil, gold and wheat are a boon to those sectors, but there are many manufacturing companies that have succeeded for years, in part because of the C$ discount to their markets south of the border. The big increase in OI means at around parity, there are some large stealth sellers of the C$.
The other big increases in the OI from yesterdays trade were the yen, up 7,105 contracts, the euro up 6,315 contracts and the A$, up 4,466 contracts.
Experts are busy touting the continued bull markets in commodities next year. As long as the buy high, hold, and sell later at much higher prices can attract new money, prices will remain buoyant. According to a Barclays analyst commodity assets under management since 2007 rose 80% to $354B. The past performance is expected to attract $60B of new money this year. Over a period of time most commodities are a zero sum game, for every winner there is a loser. Prices generally go full cycle, ending up where they started, once the bulls appetite is satiated and they start to sell.
The commodity bulls, enthusiastically promoting their theme, fail to recognize that higher prices will reduce consumptive demand, and increase supply. Funny how that always seems to work. Current US gasoline prices are an example and, as time marches on, will be a stiff headwind for US economic recovery.
There are two other concerns about higher commodity prices, and the global economic recovery. First, interest rates. Is the current run up in rates going to hold? And if so, how much will this slow the economy? Next, what is the future for the Chinese economy? There, the inflationary bubble remains, and the approach to this problem remains a mystery to the Chinese managers. A very real threat exists that resolution of this problem may prove an unexpected drag on the Asian economies.
No trading ideas today. Will look around for a place to start after the New Year.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.