May has been the best month for the US dollar in 2008 against the major currencies. Crude oil prices were delinked from the US dollar and were unstoppable. Price of soft commodities like rice, wheat, soybean and maize seemed to have broken the gravitational force. India, Thailand, Vietnam had banned rice exports which resulted rice prices in CBOT zooming. Among the base metals Nickel was the worst performer while copper continued to generate positive returns. Managing inflation was the key motive was most global central banks (other than Federal Reserve)

Volatility in foreign exchange markets was very high as due to US interest rate expectations. At the beginning of May markets expected that Federal Reserve will pause in interest rate cuts. However towards the end of May, markets have fully factored in a US interest rate hike in December. Some of the US dollar optimists have even placed their bets on October interest rate hike by the Federal Reserve. Interest rate factor was one of the prime reason for the gains in US dollar.

Zinc and Lead initially gained after the earthquake in China. Thereafter they fell on (A) Lack of major Chinese demand (B) Global inventories to remain in surplus, even after production stoppages from china (C) No major mine worker strike in any major mines.

LME Copper (3 months) reached a new high of $8889.50 and fell thereafter fell to $7885 as Chinese buyers stayed away from buying the metal.

Spot gold traded in wider $845-$940 range. Day traders and weekly traders got goose bumps while trading. A few days of sharp rise was followed by an equally swift decline.

Silver (spot) traded in $1600-$1850 wider range. In our view silver offered less risky trade than gold in the month of May. Silver traded in a range. If one was able to detect the range, it would have become a happy hunting ground for him.

Natural gas for the first time in many years outwitted crude oil, although both were unstoppable.

OUTLOOK

June is a very important month for the US dollar and global equity markets. This is a make or break month for the US dollar. There will be days when the US dollar range trades and there will days when there will be exceptionally high volatility. Be prepared for a roller coaster ride in all speculative markets.

General factors

1. US Dollar and US economy: The US dollar and the US economy have been the key driver for global growth. The subprime crisis in 2007 and extension of the same in the first quarter of 2008 resulted in the US dollar getting ripped apart. Most of the negative news on the US economy has been factored in by the markets and is being reflected in the prevailing US dollar rates. If the US economy shags in June or economic numbers reflect more downside risk than upside risk, then one should expect another round of US dollar bashing and higher commodity prices.
2. Lagging effect of record high energy prices and record high food prices: It remains to be seen whether global growth gets affected by way of a further slowdown for the rest of 2008 due to high energy prices and food prices. If global GDP rates fall below 4.10% in 2008 then one should expect base metals to trade with a softer bias for the rest of the year. Higher prices of essentials take two to three months to have a material effect on consumption and savings. It’s only from August onwards that we will come to know the trickle down effect. We expect more negative news for the global economy over the next few months.
3. Growth Versus Inflation. Central banks Dilemma: Central banks perceive the current situation even more difficult to solve than the early 1970’s. Other than the Federal Reserve and the Bank of England most of the central banks want to curb inflation without reducing interest rates. The European Central bank (ECB) stance is hawkish on interest rates. Bank of Japan may cut the near zero interest rates by a quarter towards the close of the year if Japanese growth cools. Gold and precious metals will benefit on investment demand as a hedge.
4. Federal Reserve meeting: There is the Fed meeting towards the close of the month. Over the past few years predicting the outcome of the June Fed meeting is like playing a cat and mouse game as the US interest rate outlook can change even at the last moment. Traders bet on far dated interest rate futures so the far dated outlook on interest rates is more important than the short term outlook. The Federal Reserve’s outlook on the US economy will be the key.
5. US Presidential elections: Barrack Obama is almost certain to become the democrat nomination. The fight will be between Obama and McCain for the US president. Before the US voting in November we expect (a) the US dollar to gain as event risk will prevent traders from going too short (b) Oil prices to fall. We believe that there is a nexus between oil companies and hedge fund managers in the current oil price zoom. Hedge fund mangers will reduce their crude oil long positions before the election for McCain to have an outside chance to win. (c) US equity markets to rally on expectations that US economic growth will be on the higher side under the new president.
6. Health of global financial services sector:  In the first five months of 2008, the global financial services sector has deteoriated with more firing than hiring. Banking industry was the worst hit. More and more banks are forced to raise capital in order to maintain capital adequacy. If more news continues to pour in June then gold and other safe haven investment products will get the benefit.