Forex & commodities on December 20, 2017: thoughts & outlook


Here are my discretionary thoughts on forex and commodities (oil, gold, silver, etc). I only trade the S&P 500.
Go to the homepage for my latest thoughts on forex and commodities.

Thoughts

  1. Update to my USD outlook.
  2. Front-running gold & silver’s year-end pattern.
  3. The Euro is waiting for Merkel to form a government.
  4. Commodities are stuck because the Chinese government wants the Chinese economy to slow down.

4 pm: Update to my USD outlook for 2018.
I am bullish on the USD in 2018, particularly the first half of 2018. But my reasons were wrong.
Previously, I thought that the USD would rally to at least 96 on the Republican tax cut. The market’s recent price action tells us that this is not the case.
Instead, the main driver behind a USD rally will be Trump’s upcoming trade wars. I said

Trump’s focus in 2018 will be on the trade balance with China, Mexico, Canada, etc.

  1. Trump has become significantly more aggressive to China. Trump will accuse China of “economic aggression” today.

  2. The U.S. review of NAFTA vs Canada/Mexico will be completed by March 2018, after which Trump can choose to renegotiate or leave NAFTA.

Everyone knows that the U.S. will ultimately win any trade war. The U.S. has more leverage at the bargaining table. Higher net export = bullish for the USD in the medium term.
This trade war issue will be full-blown by March 2018.
4 pm: Front-running gold and silver’s year-end pattern.
I mentioned this year-end pattern a few days ago.

Gold and silver tend to fall in December and rally in January. This has been the pattern over the past 4 years.

Here’s 2017.

Here’s 2016.

Here’s 2015

Here’s 2014

Gold and silver traders have front-run this pattern this year. Precious metals have already been going up for a week. There is still 1 more week left in 2017.


If gold and silver continue to go up next week, then I think they’ll face problems in January. This pattern is broken.
Keep in mind that January is a seasonally bearish mind for oil.

5 am: The Euro is waiting for Merkel to form a government.
The Euro was rallying perfectly until Germany’s election on September 24. The election and Merkel’s poor performance stopped the Euro’s rally dead in its tracks.

Here’s the USD.

Merkel is trying to build a government via a grand coalition. (Germany has a multi-party system, unlike the U.S.). These talks are expected to last a few months.
I think the Euro cannot start to really rally again until Merkel announces the coalition. This will be in a few months down the road.
If Merkel can’t form a grand coalition, she will most likely form a minority government too. I don’t think the Euro will fall on such news. The market hates uncertainty more than anything.
5 am: Commodities are stuck
Copper reflects the state of industrial metals (iron, zinc, etc). Copper and other industrial metals are heavily impacted by Chinese demand and speculation. Chinese traders love to trade these commodities.
Copper surged from May – September 2017 because there were rumors that the Chinese government would announce a big fiscal stimulus at its October 2017 Party meeting (more construction = more demand for commodities). The opposite materialized. The Communist Party announced

  1. Slow down heavy fixed investment (e.g. infrastructure).
  2. Control housing market (bad for residential investment).
  3. Focus on financial market control (prevent bubbles like 2015).
  4. Fix the environment.

All of these are anti-growth. Without this upcoming surge in real demand, copper and other industrial metal prices have been stuck ever since.

This medium term bullish factor for commodities has now disappeared. There is a moderately positive correlation between copper and precious metals. Gold and silver’s own price action is weak enough. Now this bullish correlation has been taken away too.

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