Commodities on a tear as the USD sinks

It feels as though he confirmed this idea that when it comes to price pressures the Fed have afforded themselves maximum flexibility and optionality to deal with changing dynamics, yet tried to remove a belief that they are stuck on a set path. The idea of running down the $8.7t balance sheet (“QT”) is one that many are going to focus on in the Jan FOMC meeting (27 Jan), and Powell gave some clarity in this testimony suggesting it will be “sooner, faster than the last cycle” and that “we tend to take 2-3-4 meeting to think these things through”.

The reaction in markets suggests the consensus was already well-positioned for this rhetoric, and with his view on optionality we’ve seen US equities rally hard, led by growth, momentum, and volatility plays. The USD has been universally sold across the board – this has boosted the commodity trade, where notably Crude is ripping and now eyeing the Nov highs of $86, and this is feeding full circle into solid moves for the petrocurrencies; NOK and CAD – USDCAD is trading the weakest since mid-Nov and feels like this has more legs to the downside.

CADJPY daily

(Source: TradingVIew - Past performance is not indicative of future performance.)

The JPY is the weakest currency on the day, however, as risk is buoyant, and subsequently CADJPY is breaking out on the daily, as is NOKJPY, and for momentum traders who like to buy strong, these are the plays – trade as a swing or take into lower timeframes and scalp the flow.

The USDX is trading right at range lows, with EURUSD (57% weight in the USD basket) grinding to the top of its range at 1.1380 – one can sense the market leaning short of USDs into today’s US CPI print – with expectations of headline CPI at 7% and core 5.4%. So, the question is would a stronger downside reaction (in the USD) be seen on a miss to CPI than an upside move (in the USD) on a beat? I suspect the former and it feels as if the street sees this risk distribution and looking for reasons to get short the USD.

Daily of Spot Crude

(Source: TradingVIew - Past performance is not indicative of future performance.)

A decent move lower in US real rates amid USD weakness is typically a green light for gold bulls, and bid up the yellow metal the market has, putting on $18 on the day. We eye the $1830 swing here (also the 61.8 fibo of the Nov-Dec sell-off), where we may see better supply, but a break would take this unloved play into $1870. Again, we’ve had many false starts in XAUUSD, but I have been wholly impressed by the yellow to ride out the recent lift in bond yields and that may be telling a story that the Gold bulls may have a better time of it in Q1.

I mentioned Crude above and perhaps we do see $86 in our sights, but the Commodity complex is firing up today, with industrial plays working, and ag’s also firing up. I like the shape of Nat Gas and for the trend-followers out there put some OJ on the radar - it's making consistent higher highs and CTAs would be all over this.