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Commodities under fire with short term dollar rise

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The new weekly note from Nitesh Shah, Associate Director – Research Analyst, ETF Securities, reports that a hawkish post-meeting statement from the Federal Open Market Committee drove the US dollar temporarily higher, suppressing gains in many commodities.

 Shah writes: “However, subdued PCE deflators and muted increases in wages took the edge off upward US dollar pressure by the end of the week and barring any surprises, commodities should be able to trade on their own fundamentals.”
 
Shah finds that the week has started off with the release of better-than-expected manufacturing China Caixin and Euro Area PMIs and the market expects a US ISM reading above the expansionary 50 marker, which could provide a cyclical boost for commodity market sentiment.
 
In terms of oil, WTI oil ETP inflows surged to a seven-month high. WTI oil bounced 6.3 per cent on Wednesday following a lower-than-expected inventory build last week. “In the run-up to the announcement, investors piled into long WTI oil ETPs (totalling more than USD86.2 million, between Friday and Wednesday), before taking profit on the news, leaving net inflows for the week at USD66.4 million, the highest since March 2015,” Shah writes.
 
“Many investors correctly believed that the prior week’s excessively high inventory build would not be repeated. Indeed rig counts in the US have been declining for nine consecutive weeks and are currently 63 per cent below the levels last year. More than USD200 billion of CAPEX cuts have been announced across the industry and the effect of the stalled projects will soon bite into global oil supply and moderate the glut.”
 
Meanwhile with the Organization of the Petroleum Exporting Countries operating at close to capacity, the traditional role of the cartel – to increase production in times of outages elsewhere – will be compromised, increasing the risk of price shocks in the oil market, Shah says.
 
The Federal Reserve’s hawkish post-meeting statement sent gold 2.6 per cent lower on Thursday last week, Shah reports, driving USD15.8 million into long gold ETPs on the day.
“For the week as a whole, we saw more than USD31.5million of inflows into long gold products as investors position for a potential bounce back. With the Fed downplaying global risks and conditioning their next rate move on the domestic market, many see the next two labour market reports as a pivotal guide to the timing of first rate hike in nine years. However, sophisticated investors realise that the payroll numbers in the labour market report are not only volatile, but subject to frequent and significant revisions. Gold’s decline this week could once again turn out to be premature.”
 
Inflows into US natural gas ETPs hit a four month high. Natural gas prices surged
11 per cent on Thursday after the release of storage data, which showed inventory building below expectations. Investors bought USD7.2million of long natural gas ETPs during the week. Shah writes: “We are likely to see some profit-taking from this, as inventories still lie more than one standard deviation above their five-year average, and prospects for a warmer winter with El Niño affecting US weather could see some of the recent injections being underutilised.”
 

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