Commodity Currencies

Keeping an eye on the currencies of big commodity producing nations not only provides us insight into demand for commodities but the health of emerging markets as well.

Canadian dollar

Canadian Dollar (CAD) was turned back at the 38.2% retracement of the 2012 decline (part of the 2011 bear market). With the break of the bear flag last week it appears the bear market rally is over.

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Australian Dollar

Australian Dollar (AUD) has been like watching paint dry since April. As long as support at 0.92 remains intact we have to assume the bear market rally is too. But with the break down in the CAD the Aussie is probably on borrowed time.

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The secular bear cycle in commodities is due to end near the end of this year.

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What to expect from Base Metals this week ?

Shanghai Metals Market expects base metals to follow divergent trends this week, but optimistic expectations surrounding upcoming economic releases should favor some prices trending up.

China Impact

China’s State Council issued guidance on reform of the household registration (“hukou”) system July 30. The proffered guidance indicates that household registration restrictions will be abolished in towns and smaller cities first. The government also indicated that it would loosen residence registration requirements in mid-sized cities “in an orderly manner”, while a points system will be established to control the number of migrants moving to cities with populations over 5 million.

Reform of the household registration system is expected to boost infrastructure construction, as well as consumption of medical care, education, cars, home appliances, and housing in general. That, plus increased investment opportunities, should bolster demand for metals. Analysts estimate reform of the household registration system to contribute 5% to GDP growth over the next six years.

US Impact

The US Federal Reserve agreed to cut bond purchases another USD 10 billion/month after its two-day policy meeting for July, but offered no clearer indication as to when it might raise rates. Although the Fed acted calmly after US Q2 growth proved brighter than expected, it did express greater optimism over the labor market and inflation. This upbeat assessment may help bolster the market.

Source: Shanghai Metals Market

MCX-aluminium (₹122.5): BUY

The aluminium futures contract traded on the Multi Commodity Exchange (MCX) has been going through a strong uptrend since May. The contract has risen some 21 per cent from its low of ₹101.25/kg recorded in May. A fall in global production coupled with an increase in demand for the metal has helped this commodity to vault higher.

On the global front, the spot price of aluminium on the London Metal Exchange has surged 15 per cent from its May low of $1,714 a tonne to $2,013. The outlook is bullish with strong support at $1,850.

A rally to $2,100 in the short-term and $2,200 or may be even higher levels in the medium-term looks likely now. The MCX-aluminium which moves in tandem with the global price is also expected to rise. This offers a good buying opportunity in MCX-aluminium for traders.

Short-term view: The short-term trend in the MCX-aluminium futures contract is up. The price action between July 22 and July 30 suggests a formation of a bull flag pattern within the overall uptrend.

The sharp rise on Monday signals the beginning of a new leg of up move in the contract. Immediate supports for the contract are at ₹122 and ₹120.5. While the contract trades above these support levels, there is no immediate downside threat.

Traders with a short-term perspective can initiate fresh long position at current levels. Stop-loss can be kept at ₹120 for the target of ₹128.

The 21-day moving average at ₹119 is a key short-term support for the contract. The outlook will turn bearish only if the contract records a strong close below this level. The ensuing target in such a scenario will be ₹117.

Medium-term view: The medium-term outlook is bullish for the MCX-aluminium futures contract.

The strong down-trend that was in place since August 2013 has got reversed decisively.

Additionally the contract has breached an important trend-line resistance at ₹122 this week. A strong weekly close above this level this week could reinforce the bullish momentum.

Key medium-term support for the contract is at ₹114.

A rally to ₹132 looks likely in a medium-term time frame. The outlook will turn bearish if the contract declines below ₹114.

In such a scenario the contract can decline to test ₹102.

hindubusinessline

DeMark Says "Sell China, The Trend Is About To End"

We noted last week the coincidental surge in China's currency and stock market (bettering US equities for 2014) after they quietly unveiled QE-lite, but, as Bloomberg reports, Tom DeMark says "selling into strength is now recommended," with losses expected over the next six months. This follows his prediction from June that China's Shanghai Composite was due for a recovery, presaging a 16% rise. With last night's hint of China's credit impulse fading and CNY now recoupled with its fixing, perhaps he is right that the short-term catalysts for gains are exhausted. As DeMark concludes, "the trend is your friend until the trend is about to end."

A reminder of the driver of China's recent strength...

As Bloomberg reports,

The Shanghai Composite Index will probably end its world-beating rally within days and fall about 10 percent, said Tom DeMark, the developer of market-timing indicators who predicted the gauge’s peak last year.

...poised to erase those gains and drop below this year’s intraday low of 1,974.38.

“Selling into strength now is recommended,” wrote DeMark, the founder of DeMark Analytics LLC in Scottsdale, Arizona, who has spent more than 40 years developing indicators to identify market turning points. “The trend is your friend until the trend is about to end.”

DeMark has had a good year in China...

DeMark’s prediction in February 2013 that the Shanghai Composite would retreat came a day before the index began an almost 20 percent tumble from a nine-month high of 2,434.48.

His prediction on June 21, 2013 that the stock gauge was poised for a recovery presaged a 16 percent advance from its closing low on June 27 through mid-September.

“It is always best to announce a top/bottom before it might occur so one is able to sell strength or buy weakness,” DeMark wrote.

*  *  *

Perhaps the market senses the hangover from China's huge credit impulse is coming...

Novelis anticipates to double the production within 2018

Company states that, it is to increase its production in North America from about 50,000 tons of automotive aluminum in 2013 to 260,000 tons in 2014. By 2015 the production will be increased up to 365,000 tons. The reason behind the increase in production is because; Novelis is now the distributor of Ford automotive models including the Ford-150 pick up truck.

Tom Boney, the General Manager of North American branch of Novelis says that even though the demand is very much rugged, the company is increasing the production to its full capacity.

Novelis is now at last facet of expansion worth 500 million dollars at its aluminum plant in Oswego, New York. Novelis has announced their project to recycle the scrapped aluminum Ford Motor Co.’s stamping and scrapping plant as it will help to regain the 40% of aluminum being lost in the process of scrapping and other manufacturing processes. 

 Both Novelis and Alcoa; the leading rivals of Novelis, have made investments in their respective North American Branch in order to supply for the production of to be launched Ford-150 pickup truck.

As the automotive producers are about to cut down the weight of vehicles in order to reach their estimated CAFÉ targets, Novelis hopes that 70% of pickups will have aluminum bodies, and 80 % of hoods and 45% of doors will be made of aluminum. 

Australian miner Western Areas sees strong bids coming for its nickel

Australia's no. 3 nickel miner, Western Areas , said on Monday a ban by Indonesia of nickel ore exports was helping stoke strong interest in a tender it is planning for future concentrate sales.

With the ban starting to pinch world supply, metals refining companies and trading houses were scrambling to secure high-purity nickel concentrate for blending with lower grade material to produce metal fetching price premiums, said Western Areas's Executive Director David Southam.

Nickel sells for about $18,380 per tonne compared with $13,900 immediately before the ban went into effect on Jan. 12.

A 13,000-tonnes-per-year supply contract Western Areas holds with Chinese metals refiner Jinchuan Group expires at the end of 2014.

Nickel is being driven, say analysts, on bets that China is running short of the metal used to make stainless steel because of Indonesia's ban. Until the ban, aimed at spurring a value-added processing industry, Indonesia accounted for 15-20 percent of world supply.

However, nickel inventories are recently hitting record highs as hidden stocks leave China following a fraud probe at Qingdao's port, showing supplies are plentiful despite a halt to shipments from Indonesia, which could squash further supply-side price increases. 

Still, Southam said the company was already fielding expressions of interest from a range of potential buyers and also expects to see hefty competition emerging from nickel smelters, commodity traders, other nickel producers, including Jinchuan, and stainless steel companies.

Speaking on the sidelines of the Diggers and Dealers mining forum, Southam said Western Areas was producing a high-magnesium-bearing nickel concentrate commanding 90 percent or more of the London Metal Exchange refined metal price.

He declined to name those showing interest in buying the concentrate.

BHP Billiton , which already buys 12,000 tonnes of nickel in concentrate from Western Areas to feed into its Australian smelter, is seen as a logical contender for the additional material, following the closure of one of its own mines last year due to earthquake damage.

Southam said there were signs the ban was working in Indonesia's favor, with some Chinese nickel pig iron producers already relocating to Indonesia to construct plants.

"As that happens, it is less likely that Indonesia would do away with its ban," Southam said. "All indications so far are that the ban is going to hold."

Other Australian miners are also benefiting. Sirius Resources NL is in late-stage negotiations with a trio of major nickel smelters to supply up to 26,000 tonnes of nickel concentrate annually. 

Sirius stock has risen more than six-fold in the two years since it discovered the Nova nickel deposit in west Australia, partly on expectations the concentrate would command a premium from smelting companies when output begins in late 2016.

Source: Reuters

HSBC/Markit Services PMI for July: 50.0 (prior was 53.1)

China data:

HSBC/Markit Services PMI for July, 50.0

• prior was 53.1
• Services PMI is at the lowest since the survey began in 2005

And the HSBC/Markit Composite PMI for July. 51.6

• prior was 52.4

Key points from Markit/HSBC:

• New order growth accelerates at manufacturers, while new work rises fractionally at service providers
• Input price inflation quickens to eight-month high at the composite level
• First expansion of composite employment since March

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

• “The headline HSBC China Services PMI came in at 50.0 in July, the lowest reading since the series began in November 2005.
• Both the new business and outstanding business indices declined from their levels in June.
• The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities as property related activity, such as agencies and residential services, see less business.
• Meanwhile, the employment and business sentiment indices remain stable.
• In the coming months, we think the service sector may get some support from the recovery in investment.
• But today’s data points to the need of continued policy support to offset the drag from the property correction and consolidate the economic recovery.”