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Kitchen sinks and global markets

 In Newsletter

Issue 150

Assets Covered: CNY, Crude Oil Futures, USD, Copper Futures

 

 

In our recent Quick Hit interview, we talked with portfolio manager Tracy Shuchart about the US Dollar, crude oil prices, the Chinese Yuan (CNY) and industrial metals. Through Q1 of this year, Complete Intelligence has expected US Dollar strength and a bit of a pullback of the other assets discussed (managed devaluation in the case of the CNY). How are things faring?

 

Fed intervention extended prices further and longer than we expected. On Tuesday, Federal Reserve Chairman Powell admitted the Fed “threw the kitchen sink” at the market. This kept the US Dollar artificially low and propped up equity and commodity markets. Notice that “threw” is past tense, not present active tense “throwing”. We’ve started to see commodity and equity prices break, with crude prices down and copper contracts pulling back dramatically. We admit that our Complete Intelligence forecasts shot low for March, but even Artificial Intelligence can’t fight the Fed. April will be very interesting.

 

As we discussed with Tracy, crude prices have started to fall. On Tuesday, West Texas Intermediate fell 6.8%. This happened despite the supply quotas that were extended at the recent March OPEC meeting, resulting in price spikes. Instead, Complete Intelligence expects crude to meander in the mid-50s through Q2. A Q1 runup followed by a moderate Q2 fall has been baked into our expectations for nearly half a year, so this is playing out very much as we had expected, although a bit later owing to Fed intervention.

 

 

NYMEX WTI Crude Oil Futures (CL1)
CI Futures generated this chart. Book a demo to see it live in action.

 

 

CNY is another major factor with both trade and commodities purchases. Complete Intelligence has expected the US Dollar to appreciate toward the end of Q1. On Tuesday, the Dollar (DX1) traded at 92.375, which is just below our expectation of 92.601 for April. Dollar strength typically is also accompanied by CNY weakness. Although the Chinese Yuan is very much a manged currency, it appreciated dramatically (intentionally) since Q3 2020. Complete Intelligence expects CNY to approach 6.6 in April, then settle near there for much of Q2.

 

 

CHRIS/IDE USD Index Futures (DX1)/USD/CNY Rate
CI Futures generated this chart. Book a demo to see it live in action.

 

 

As discussed with Tracy, Chinese buyers have been hedging the prospect of currency devaluation by hoarding industrial metals. This hoarding contributed to the dramatic rise of metals like zinc and copper as the CNY soared in value. While unintended, Copper has been one of the largest indirect beneficiaries of Fed intervention, with prices (COMEX HG1) peaking at $4.37 on Feb 24th. As the CNY devalues and global demand continues to meander, copper is likely to see a disproportionate decline. Copper is down 8% since its peak and we expect a further fall to $3.10-3.20 in April (similar to Q3 2020 levels).

 

 

COMEX Copper Futures (HG1)
CI Futures generated this chart. Book a demo to see it live in action.

 

 

While we do expect near term falls in some commodities, we do not expect the magnitude of the fall to be as dramatic as we had expected just a month ago. Somewhat counterintuitively, kitchen sinks are thrown to soften blows.

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