Commodity Update: 23rd January 2010

Fundamental Outlook
The base metals complex will continue to take cues from the movement in the dollar, economic data and risk sentiment in the financial markets. Though Chinese data has come on the positive side concerns over lower lending in the world's biggest base metal consumer may lead to downside pressure. If the dollar continues to retain strength on the back of risk aversion then base metal prices could witness downside pressure. But sharp losses in the case of Nickel could be capped on the back of supply-related issues.
Copper managed to end in the green last week despite a rise in inventories
Base metal prices ended last week in the negative territory as concerns over the strength of the global economic recovery coupled with monetary policy tightening in China put pressure on prices. The only exception was Copper as the red metal reversed losses by the end of the week as fund buying came in as a support to prices. Base metal prices faced downside pressure in the last week as a stronger US Dollar also exerted pressure on prices. Though China released upbeat economic data financial markets witnessed risk aversion that reduced demand for higher-yielding and riskier investment assets. Economic data from China indicated that the country's GDP growth for the year 2009 was higher than expectations, reaching 8.7%. China's fourth-quarter GDP for 2009 increased 10.7% and the country's industrial output grew 11% for 2009. Though this data is positive, base metal prices may feel pressure on the downside as this sharp growth in GDP could demand further stringent monetary policy tightening by the Chinese government. This could be a bearish factor for base metals as China is the driver for base metals demand and curb in credit could affect demand for the commodities.
Stronger US Dollar puts pressure on prices
The dollar gained 1.4% in the last week and put pressure on dollar-denominated commodities. A stronger dollar makes base metals look unattractive for holders of other currencies. The dollar is gaining strength as risk aversion in the financial markets coupled with poor investor sentiment has led to higher demand for the low-yielding dollar. Overall commodity prices also declined on concern that China will raise interest rates and banking curbs proposed by US President Barack Obama may dent the US economic recovery. If worries over the global economic strength continue to linger then the dollar could strengthen further and add downside pressure on dollar-denominated commodities. Markets still remain concerned that the economic recovery may have been backed by the stimulus support measures by global policymakers and the impact may not be visible in the immediate future. These concerns in the financial markets may reduce risk appetite of investors and lead to selling pressure in higher-yielding and riskier investment assets.
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