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DOLLAR: The Dollar appears to be holding just above the prior lows as if it is waiting for the final judgment on the Greek 10 Year debt offering. At least from the early indications, the debt offering went off fairly well and when one combines that sentiment, with the potential for decent US economic news, that could leave the bear camp with the near term edge in the Dollar. However, the Dollar might not fall aggressively because of the presence of the ultra critical US Non Farm payroll report on Friday morning. It is also possible that the Dollar is set to get some minor support from the latest Chinese tightening effort, but that support will probably be totally washed away because of another push in the US for the Volcker rule. In our opinion, pushing for the Volcker Rule should mean that some money will decide to flee the US Dollar. In conclusion, the bearish items seem to easily out number the bullish items, with favorable US data likely to continue lifting oversold Non Dollar currencies. Critical support in the March Dollar index is seen at 79.97 but a decline down to 79.75 would not be surprising today.

EURO: The Euro was recently oversold technically and perhaps under excess fundamental pressure. While the final results might offer up a surprise, the initial results from the Greek debt offering seem to have been good enough to keep anxiety levels low and that could provide the Euro with a further short covering lift. Unfortunately, Euro zone GDP readings overnight showed a gain of only +0.1% and the trade saw fresh Chinese tightening moves overnight and that seems to be limiting the Euro in the early going today. However, the Euro needs help to rally and we doubt that the rate decision from the ECB will offer any surprises, but we do think that favorable US numbers could prompt some additional buying of the March Euro. Initial support in the March Euro is seen at 1.3654 and there is a chance of a fresh new high for the week if the US numbers are positive.

YEN: The March Yen managed another range up move in the overnight action but it would appear that the Yen is managing the gains off information that might have been seen as bearish earlier in the week. Perhaps news of an earthquake in Taiwan overnight provided the Yen with a lift and perhaps the currency trade is expecting a disappointing US Non farm payroll reading on Friday morning. In any regard, we have been suggesting all week that the Yen was capable of rallying sharply this week and it wouldn’t be surprising to see a spike high and failure above the 114 level.

SWISS: The Swiss seems to be poised to rally but we get the sense that the rally would be mostly technical short covering. However, a temporary calm in the Greece situation and improved economic views toward the US recovery would probably prompt the March Swiss to rally back above the 94.20 level. For the time being, being long the Swiss is like being long the world economic outlook.

POUND: The Pound continues to benefit from a leveling of the Greece debt crisis and perhaps because of a slight improvement in the US economic outlook. In retrospect, one might also suggest that sentiment toward the Pound and the UK economy was really negative early in the week and therefore some short covering is deserved in the Pound. However, a UK Halifax house price reading for February fell overnight and therefore the bull camp in the Pound probably needs some help from world equity markets and also from the US economic report front. The March Pound would seem to have little resistance until the 1.5150 level, but being long the Pound, might mean really good numbers lift the currency slightly, while slack numbers resume aggressive selling interest.

CANADIAN DOLLAR: The Canadian Dollar remains in a bullish fundamental and technical posture. However, the Canadian is somewhat short term overbought and seemingly in need of a patently supportive US economic report flow to manage more gains straight away. The Canadian is sensing forward progress on the global economy, but we are a little uncomfortable suggesting fresh long plays in the upper quarter of the last 5 1/2 month trading range. Long term, we are bullish but buying at this level on the charts feels risky.

TODAY’S MARKET IDEAS: The bias in the Dollar would look to remain down especially if US numbers are decent and the Greek debt auction is deemed to be mostly successful.

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DOLLAR: Not surprisingly the Dollar is lower this morning as concerns toward EU debt are apparently being temporarily pushed to a back burner position. However, the debt concerns haven’t dissipated they are just a little stale or perhaps temporarily over exposed. It does seem as if the recovery bounce in equities is serving to undermine the Dollar this morning, as higher equity price action gives off the impression of a trade that is going to be interested in slightly riskier investments. It is possible that favorable Coke earnings, a favorable US Treasury auction result and hope for the Senate Jobs bills could add to the downside tilt in the Dollar throughout the trade today. However, we doubt that traders will want to remain negative toward the Dollar beyond the US trading session today. Apparently the markets are currently of a mind that recent Greek maneuvers are capable of staving off more near term concerns and that also is prompting some long liquidation of the Dollar. We see the 80.00 level as a critical support zone, with longer term up trend channel support seen down at 79.46, but that up trend channel support line climbs up to 79.62 on Wednesday.

EURO: While the Euro is seeing some technical short covering buying in the early trade today, the scheduled number flow from the Euro zone wasn’t exactly overly beneficial to the bull case. In fact, a German CPI reading overnight actually declined by 0.6% and that would seem to point to deflation rather than inflation in the Euro zone. Therefore suggestions from Trichet that the EU needed to keep inflation expectations anchored, hardly serves to foment inflationary views toward the Euro. However, the Euro was certainly aggressively oversold into last week’s lows and a slight recovery effort in the equity markets today could allow for a temporary rise back above the 1.3750 level in the March Euro. In the end, we just don’t see the catalyst for an end to the downtrend pattern in the Euro.

YEN: News of a further tempering of the Greek situation and higher equity market action overnight has undermined the Yen from a flight to quality perspective. Up trend channel support is seen all the way down at 110.22 today, with that support level rising to 110.38 on Wednesday. In an indirect way, the Toyota problems could be a slight undermine to the Yen, but the biggest blow to the yen might come from a temporary unsustainable reaction to the upcoming US jobs bill.
Aggressive traders should be willing to sell the March Yen on any rally today back above the 112.00 level.

SWISS: Like the Euro, the Swiss was technically overdone around the lows last week and now the currency is due a temporary corrective bounce. At least for the near term, the Greece situation is apparently going to shift to a back burner status and that should also allow the Swiss to recover. Initial resistance is seen up at 94.00 but we can’t rule out a temporary rally back above that level in the coming 8 hours of trade. In other words, US corporate earnings, US auction results and the promise of another US jobs bill seems to have taken the Greece story out of the headlines.

POUND: Despite seeing some recovery action in other non dollar currencies this morning, the Pound is not showing much in the way of a bounce mentality. In fact, one might have expected the Pound to benefit from slightly higher equity market action overnight but apparently the Pound isn’t easily cheered. A widening of the UK trade deficit overnight seems to have undermined the Pound, as the trade took those readings as confirmation that the recovery progress in the UK is still very questionable. In short, the trend in the Pound looks to remain down with only a brief pause above the 1.55 level today.

CANADIAN DOLLAR: The Canadian is getting some temporary support from what appears to be a slight improvement in global macro economic sentiment. However, we just don’t see the fundamental news to suggest that equities, commodities and the Canadian are poised for sustainable upside action ahead. Therefore, aggressive and short term traders should consider getting short the March Canadian on a minor bounce today back to the 93.83 level.

TODAY’S MARKET IDEAS: Minor Dollar weakness early today, not an end to the recent uptrend pattern.

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We continue to stand by the view that a short position in the Japanese Yen will be a consistent and perhaps significant play in the coming year. As we have mentioned in prior issues of this newsletter, we think the Yen saw an undeservedly dramatic appreciation due to the sub-prime crisis and that global interest rate anomalies served to boost the Yen to levels that would never have been possible based solely on interest rate and economic differentials. We also think that the Yen was given an additional and possibly final boost into the overvalued atmosphere in the wake of the Dubai credit crisis. From the late 2009 high to the January low, the March Yen already mounted a slide of 900 points, highlighting how overvalued the Yen got. While it has managed a bounce off its January low, the Yen still remains 2900 points above the mid 2007 lows.

It is also our opinion that the global interest rate anomalies drew what could be one of the largest speculative inflows to a single trading theme in history in the form of the “carry trade” and that the unwinding of the those positions could exert significant pressure on the Yen. While there are certainly many reasons this bearish outlook could prove wrong, perhaps the most painful would be if the world economy were to fail to recover. However, in the event that the global economy does continue to recover and more countries move to raise interest rates, we think the onus will be on participants in the carry trade to unwind their borrowing of cheap money in the US that they used to invest in higher yielding instruments in Japan, which would force them to buy dollars and sell Yen. While it is always possible that the Japanese economy could throw off its decade long deflationary condition and begin to grow aggressively, we don’t see that as a likely prospect. Therefore, we will continue to suggest that traders use moves back above the 110.20 level in the Yen to implement longer-dated, somewhat out of the money Yen put positions.

After seeing a 7 year pattern of declining Dollar action, it was logical for the Dollar bears to be a little concerned about the January 2008 to March 2009 recovery effort. However, we would suggest that the subsequent return back near the 2008 lows and then the rejection of that weakness might be a sign that the Dollar found some form of low value zone. In addition, considering the number of negatives that have been lobbed towards the Dollar over the past year, one would have expected a full return to the 2008 lows, especially in the face of ideas that the US was trending toward a default of its debt commitments. It should also be noted that the TARP costs were not as bad as feared and that the recent loss of the Democratic super majority in the Senate could bring about some spending restraint on the part of the federal government. With the US economy also showing signs of recovery, one could suggest that the Dollar is entering 2010 with significantly fewer burdens than it saw at the beginning of 2009.

Lastly, it would seem like a lot of luster has come off the Euro compared to last year, and that has prompted many traders to suggest that the Euro zone might be one of the last areas to have the capacity to raise interest rates. Therefore, we think traders have to give the Dollar the benefit of the doubt. With the prospect of the highest Dollar exchange rate since September 3, 2009, one could suggest that the technical outlook on the Dollar has turned positive.

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DOLLAR: Despite news that Moody’s might have given Greece a decent shake on their Fiscal program overnight, the Dollar has managed to claw higher on the day. With the JAL bankruptcy overnight and a softer than expected German ZEW reading released overnight, it is possible that the US Dollar was seeing some macro economic differential buying, but that type of buying should have been checked by the news of more Chinese and Taiwanese tightening efforts. In looking ahead, the macro economic news flow is expected to be thin until Wednesday and Thursday and that could reduce the breadth of the daily trading range in the Dollar today. While the January 12th Commitment of Traders with Options report for US Dollar showed the Non-commercial position to be net long 33,550 contracts, with the Non-reportable position net long 2,887 contracts, that made the “combined” spec and fund position net long 36,437 contracts as of early last week. However, with the Dollar sitting marginally higher, than the level where the COT report was marked off, it is possible that the length of the Dollar positioning has become inflated somewhat. We see a critical pivot point in the March Dollar Index up at the 77.66 level and a move back above that level could project a near term rise to even numbers of 78.00. We think that a lack of up beat macro economic news from the Euro zone and also from the US will generally leave the Dollar with a slight edge.

EURO: With a downward bias in the March Euro early this morning it would appear that the bearish bias from late last week remains in force into the opening today. While the January 12th Commitment of Traders with Options report for Euro showed the Non-commercial position to be net short 15,925 contracts, with the Non-reportable position net long 4,837 contracts, that made the “combined” spec and fund position net short only 11,088 contracts as of early last week. Therefore, the Euro might be building a larger net short positioning, but that positioning isn’t extreme enough to take the negative bias away from the Euro. In fact, the macro economic and geopolitical news from the Euro zone recently has been disappointing and that should leave the March Euro in a position to fall down to the 1.4250 level. In fact, in the face of mostly discouraging global economic news, a low of 1.4215 could be seen this week.

YEN: The Yen is showing some signs of short covering and perhaps even some temporary outright buying. In fact, with a series of currencies losing their bid overnight, the fear of Chinese tightening and a Bankruptcy at JAL announced that could give the carry traders a fresh measure of confidence. In our view, one can’t rule out a temporary trading range of 111 to 110.00 in the March Yen early this week, but in the wake of the slightest improvement in numbers, we would suggest that traders look to add to shorts or continue to acquire long dated out of the money Yen put options.

SWISS: Like the Euro, the Swiss is clearly disappointed with the pace of the global recovery effort. With many global equity markets seemingly in a negative bias, it is likely that the trade will continue to pressure the March Swiss down toward the next consolidation support zone of 96.37. The Swiss bulls need something positive from the IBM earnings and or from the scheduled US economic readings, in order to throw off the modest downward bias that is in place.

POUND: With a massive range up breakout on the Charts, it would appear that the Pound is poised to win by default. Perhaps some very hot annualized inflation readings from the UK overnight have provided the Pound with its edge today but the lack of competition is perhaps the biggest element in the Pound bull’s camp. In fact, with little in the way of alternative leadership today, the March Pound could easily see a rise back above the 1.65 level in the coming two trading sessions.

CANADIAN DOLLAR: With the Swiss and Euro out of favor and the Dollar only showing moderate interest this morning, the Canadian is somewhat locked in place. However, one might have expected the Canadian to be under some pressure in the wake of the slackening global macro economic outlook, unless of course the trade sees the Chinese tightening moves, as a sign that the Chinese economy is strong enough, that the central bank is endeavoring to begin the battle against inflation. The March Canadian has close in support at 96.88 and we see no reason for that level to fail, unless global equity markets come under more definitive selling pressure ahead.

TODAY’S MARKET IDEAS: The only clear leadership markets are the Pound and the Dollar.

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DOLLAR: With the March Dollar Index closing below the 78.00 level yesterday and the Greenback tracking lower initially this morning it would appear as if interest in riskier instruments remains in place. We also think that the trade has temporarily lost respect for the US economy and in turn has temporarily lost its expectation that US rates are going to rise anytime soon. Therefore, the path of least resistance is pointing downward in the Dollar and it may continue to point lower until there is a distinctly strong US economic reading, or perhaps some surprise international flight to quality development. It is also likely that the overbought technical position of the Dollar is contributing to the weakness this morning, as the most recent COT report put the “combined” spec and fund Net Long position in US Dollar at new record level of 41,167 contracts. Therefore, the Dollar was clearly overbought technically and perhaps a bit overdone fundamentally around the recent highs and that could clear the way for a temporary slide. However, we suspect that the big down trend pattern in the Dollar has ended and that traders will eventually see a resilient Dollar trade ahead. In fact, in the early going today, the market clearly rejected the 77.39 level in a rather definitive fashion.

EURO: Like the Dollar, the Euro seems to be garnering a large portion of its action from technical balancing influences, instead of classic fundamental issues. Nonetheless, the Euro did see a “combined” spec and fund position that was net short 20,513 contracts as of early last week and therefore the sharp bounce off the 1.4250 level isn’t that surprising. In looking at the flow of euro zone economic data, there doesn’t appear to be a classic fundamental reason to consistently push up the Euro, but given ongoing economic euphoria in the equity markets, it is possible that the Euro will see some risk orientated buying. However, while the German jobless situation seemed to improve in December, we just don’t see the economic condition in the Euro zone as an attraction for capital. At least in the short term, the bulls look to have an edge, with a temporary move back above 1.45 possible, before the prowess of the US economy regains the upper hand later this week.

YEN: With a weaker Dollar seen over the last two trading sessions and the US Fed reiterating the need to leave interest rates down, the carry traders are emboldened again. However, we would see a return to levels above 109.50 as an opportunity to get short the Yen at a higher level, as recovery is ahead and eventually the carry trade will be unwound. With the magnitude of the November through December washout simply massive in size, the first retracement point of the break in the March Yen was all the way up at 111.35, but we doubt that the market will see that much of a sustained recovery ahead. Let the market bounce a little before adding or implementing fresh long term short side plays.

SWISS: In the March Swiss, a normal retracement of the November through December slide would seem to allow for a recovery bounce back to 97.30 this morning without even altering the downtrend pattern. The 50% retracement level for the Swiss is now seen up at 97.94 and a close above that level would get our attention and cause us to doubt our longer term bearish view toward the currency. However, as in other currencies, temporary weakness in the Dollar allows for some short covering in non Dollar currencies.

POUND: The Pound clearly lost its bullish momentum in the prior trading session and with the range down washout action this morning, it is clear that the fear of the UK debt load is once again behind the weakness in the Pound. A close below 1.60 today could project a further slide down to 1.5912 in the coming trading sessions. In short, the inability to hold up in the face of an early Dollar slide really highlights the Pound as one of the weakest currencies.

CANADIAN DOLLAR: While the Canadian remains poised just under its recent highs, we think that the Canadian needs a bit of a perfect macro economic storm just to continue to rise toward the 98.00 level. In other words, the Canadian needs a weaker Dollar, up beat macro economic sentiment and perhaps even noted ongoing gains in equity markets to catch what we would call a further recovery wave of buying. The path of least resistance looks to be pointing upward, but further gains might be difficult to engineer and the risk to longs has risen.

TODAY’S MARKET IDEAS: Temporary technical balancing in the Dollar provides a temporary rally window for the Yen, Euro and Swiss.

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DOLLAR: At least in the early action today, the Dollar appears to be in the midst of a further profit taking slide on the charts. Apparently the US housing news yesterday was a significant undermine of sentiment. However, the Dollar was already in the midst of a correction prior to the weaker than expected new home sales news was released. If the scheduled data was responsible for the wave of selling in the Dollar yesterday, then the market will be taking a long hard look at the claims and Durable goods data at 7:30 am this morning. However, the Senate vote on its Health Care reform bill is expected to start at 7:00 am eastern time and the outcome of that vote might be seen as an added negative to the Dollar. In other words, since the passage of the health bill became a nearer term reality, the Dollar seems to have come under pressure and therefore a passage of the bill looks to extend that bias today. While some might wonder if the Senate can get the bill passed today, one shouldn’t expect Congressman to work any overtime, as they already have guaranteed pensions and Cadillac health care in place. More downside in the Dollar today, with initial targeting seen at 77.74, unless the scheduled data disappoints and then the low today might be seen down at 77.60.

EURO: Technical short covering continues in the Euro as the fundamental shift doesn’t look to be definitive enough to justify the type of bounce seen in the Euro over the last two trading sessions. However, less concerns toward the situation in Greece seems to be contributing to the euro recover and that development alone could give the euro a sustained lift directly ahead. While a normal retracement of the December slide in the March Euro would allow a bounce to 145.67 without altering the down trend pattern, we doubt that the market is poised for that type of recovery. In fact, unless the US scheduled data is disappointing this morning it might be difficult for the March Euro to get above the next close-in resistance zone of 144.30 today.

YEN: Like the rest of the currency markets, the Yen is seeing a technical reversal of recent trends. It is possible that a series of BOJ comments overnight have fostered some fresh bargain hunting buying in the Yen, but if one looks deep into the BOJ Governor dialogue overnight, the Japanese economy continues to face serious slowing threats and that in turn could provide fundamental resistance to the March Yen directly ahead. However, a temporary recovery back above the 110 level, looks to be ahead, with a possible bounce to 110.56 possible in the coming two or three trading sessions. We continue to think that the yen might be the best currency sell for all of 2010.

SWISS: A normal retracement of the November through December washout in the March Swiss would seem to allow for a rise to 97.30 level. In fact, unless the US scheduled numbers are stronger than expected this morning, we see no reason to call for an end to the upward track on the charts. Traders should note that the March Swiss would regain its 100 day moving average at 96.90 today and that could give the bull camp a little added confidence.

POUND: While many commodities have waffled around their 50 day moving averages and the Swiss is attempting to regain its 100 day moving average, the March Pound managed to climb back above its 200 day moving average overnight. However, with the BOE recently fostering ideas that quantitative easing might be left in place and UK economic readings this week mostly disappointing, the trade in the Pound is lucky to have noted weakness in the Dollar, as buyers wouldn’t be interested in the Pound because of its fundamentals. A normal retracement of the November/December slide in the Pound, would allow for a bounce back to 1.6270 without actually derailing the downside pattern.

CANADIAN DOLLAR: We think the Canadian has clearly benefited from the recent reversal in the Dollar and to a degree it is also possible that the Canadian benefited from a recovery in oil and metals prices. At least in the near term, the losses in the Dollar should allow the Canadian to continue to win by default. Near term upside targeting is seen at 96.08.

TODAY’S MARKET IDEAS: Ongoing technical pressure to weigh on the Dollar again today and in turn that should serve to lift all Non-Dollar currencies.

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DOLLAR: The Dollar remains in a partially bullish posture after last week’s impressive range up extension and that is telling in of itself. In other words, the Dollar has managed to hold up despite talk that “risk” trades are back in vogue again and that is in a sense a true change. While it is premature to suggest that money is expecting a greater return inside the Dollar directly ahead, the trade is seeing the signs that the US could be getting in a position to raise rates in the future. With some slack economic readings from the euro zone overnight, one could also suggest that the macro economic differential between the US and the Euro zone has started to shift and that could also be another source of residual buying interest for the Dollar. While the Dollar did see some minor selling pressure off the news of the Dubai bailout overnight, the trade seems to be looking at the Dollar in a slightly different light. Furthermore, with a lack of scheduled US numbers due out today, it could be difficult for the market to throw off the bullish tilt in the Dollar from last week. With the December 8th Commitment of Traders with Options report for US Dollar showing the Non-commercial position to be net long 13,854 contracts, with the Non-reportable position net long 1,339 contracts, that made the “combined” spec and fund position net long 15,193 contracts as of early last week. In short, the Dollar showed only a modest net spec long positioning and that could mean that the Dollar isn’t in danger of becoming technically overbought off minor upcoming gains.

EURO: While the March Euro is showing signs of rejecting the lows forged at the end of last week, we can’t argue with a continuation of the bear track. In addition to slack Euro zone economic readings overnight, it would not seem like favorable global equity market action is providing the Euro with much in the way of lift. In fact, the Euro zone showed a decline in industrial activity and a loss of employment and that could prompt the trade to assume that the Euro zone won’t be poised to raise interest rates anytime soon. In fact, in order to turn the down trend pattern around in the March Euro, might require a rally back above 146.80. However, the December 8th Commitment of Traders with Options report for Euro showed the Non-commercial position to be net long 586 contracts, with the Non-reportable position net long 18,189 contracts, and that made the “combined” spec and fund position net long 18,775 contracts as of early last week. However, despite the slide in the Euro in the wake of the COT report mark off, the Euro probably remains minimally net spec long and vulnerable to more selling.

YEN: The Yen appears to be showing strength in the early action today but considering that the current trade is still significantly below the highs from last week, we aren’t surprised in the attempt to bounce. However, we continue to think that the November highs in the Yen are some form of significant historical high that won’t be replicated easily. In fact, we think last week’s failed rally above 114.00 has created a fairly significant resistance zone that traders should use as an area to implement fresh short side position plays. The 50 day moving average in the March Yen is seen down at 111.74 and that could become an extremely critical pivot point later this week.

SWISS: The Swiss has clearly fallen below the 50 day moving average and seems to be entrenched in a downward bias on the charts. We think that the SNB is facilitating the slide in the Swiss and that a sub 86.00 trade is likely in the coming week. Even more surprising is the fact that the Swiss continued to slide in the face of a less aggressive SNB intervention dialogue at the end of last week. In order to throw off the down trend pattern in the March Swiss, probably requires a close back above 97.45.

POUND: Even in the face of up beat economic dialogue from the UK Prime Minister, the Pound appears to remain in a downward tilt on the charts. With the March Pound sitting comfortably below the 50 day moving average and the markets not exactly enamored with the growth news coming out of the UK economy, it might be difficult for the Pound to avoid a near term return to the 160 level. One might have expected the Pound to bounce, in the wake of the Dubai bailout news overnight and that in turn suggests that the Pound looks to remain mired in a downward bias on the charts.

CANADIAN DOLLAR: The Canadian wasn’t able to attract enough non Dollar buying support to overcome the bullish tilt in the Greenback at the end of last week and that still doesn’t seem to be case into the opening today. With a host of key Canadian commodities remaining weak and the residual interest in the Dollar apparently too much for the Canadian trade again, the path of least resistance in the March Canadian looks to remain down. In fact, an 8 month old up trend channel support line was also violated overnight and the Canadian also fell below the 50 day moving average late last week and therefore the bear camp looks to have a series of technical indicators in its favor into the opening today.

TODAY’S MARKET IDEAS: Expect the Dollar to gain against the Swiss, Canadian and Euro this week.

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In retrospect, 2009 was a very impressive year for the commodity markets. For most of the year commodities were seen as “the” place to be, with many analysts touting them as a new and potentially sustainable investment class. Indeed, certain commodities forged very impressive rallies in the face of highly uncertain economic conditions, with the Continuous Commodity Index forging a gain of more than 30% from the end of 2008 to the October 2009 highs. If one also takes into consideration the low to high rally in crude oil prices of 74% and the 94% run-up in sugar prices, it would seem like certain commodities are well on their way to pricing in a recovery.

With the sharp, surprising run-up in equity prices of 67% off of the March 2009 low, there are a number of analysts who view the equity markets as pricing in positive growth for 2010. While the outlook for the economy remains very suspect as of this writing (and many traders might consider the commodity markets as overstating the recovery potential), a bit of historical perspective will lead one to conclude that many commodity markets still have significant upward potential.

In our opinion, a large portion of the commodity price gains that were forged in 2009 were simply a rejection of severely deflated pricing. In some cases markets fell to (and even below) the cost of production and did so off of sentiment that suggested demand was going to fall to depression type levels and not recover for years.

But as the situation was so extreme (interest rates approaching zero, widely accepted expectations for a continuous deflationary spiral and, for a while, little or no hope of an end to the crisis) the conditions that had sent prices to extreme lows in 2008 and early 2009 may not be repeated very soon. It could be very difficult for markets like natural gas, crude oil, sugar, cotton orange juice, copper, coffee and corn to return to the lows they have forged over the last 18 months. And while markets like cocoa, soybeans, soybean oil and wheat may seem to lack the fundamentals that would allow for strong upside price extensions again in 2010, against a backdrop of a falling Dollar, fairly consistent global demand growth and ongoing investment flows toward commodities, even those “weak horses” could catch some spillover support.

One could say that 2009 was a year to “close your eyes and buy everything physical.” In contrast, 2010 looks like a year to be more selective. To be sure the direction of most commodity prices will still be largely a function of the direction of the economy, but while we have to assume that the US will slowly claw its way out of the sub-prime disaster, we have to be aware that there will likely be periodic setbacks.

However, never in history has the US Federal Reserve been so forced into a position of erring to the side of inflation. Adding into the equation what appears to be a long term devaluation of the Dollar and unprecedented quantitative easing by the most of the world’s central banks, one is presented with a spectacular, classic inflationary setup for commodities.

Picking up Where We Left off Ahead of Sub-Prime

Certain players maintain that steep commodity price gains in the 2000 to 2008 time frame were artificial, or they maintain that many of the highs made during that time were irrational and not really a reflection of fundamental conditions. But even before the new millennium arrived The Hightower Report often warned of an impending wave of “Boom and Bust” pricing in commodities, as we realized that decades of disinvestment would expose the world to periodic instances where demand would overrun supply.

On the other side of the coin, we also recognized that old ways and opinions die slowly and that many commodity producers, traders and even analysts would attempt to apply old, historical pricing to the new commodity era, which in turn would foster a movement to attempt to limit investment in commodities. Those in favor of regulation to limit such investment in commodities suggest that fund buying is exaggerating price levels in many commodities and must be stopped. If we could call an end to globalization, rising global standards of living and improved diets, it would make sense to limit investment toward commodities, but as it stands the markets need more investment and more supply.

Some players point to the late 2009 rally in soybeans as a rally that was unjustified by “the fundamentals” of the soybean market. Perhaps it should be said that soybeans were not following the old soybean market fundamentals but instead soybeans were following the new fundamentals of rampant Chinese demand, probably the biggest inflationary threat seen in the modern era. While soybean prices might be expensive relative to expectations for a big crop from South America, they might not be as expensive in the context of tight world corn supplies and in terms of the deflated Dollar.

Some players now want to call an end to the globalization wave despite, the fact that hundreds of millions of individuals in the developing world are poised to move into the middle class. The sub-prime disaster may have temporarily derailed the stellar growth in developed countries, but the rapid acceleration in standards of living in the rest of the world will not be easily denied. And while the recent price gains have come a long way towards repairing the lack of investment in mining and oil exploration and production, global commodity demand looks to continue to grow, right along with the biggest explosion of capitalism in the history of mankind.

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DOLLAR: While the December Dollar appears to remain entrenched in a downward track on the charts, it would also seem like the Dollar ranges are narrowing and the downside momentum is waning. While there doesn’t seem to be a reason to suspect a landmark change in the Dollar fundamentals, one has to acknowledge that there is the prospect of a slight change in the interest rate and or macro economic differential into the upcoming US Non farm payroll report. In fact, the press is starting to toss around the idea of exit strategies and that in turn might serve to take some of the selling pressure off the Dollar. However, in order to turn a very definitive down trend pattern around, probably requires something significant from the November jobs report. While we think there might be a slight decline in the unemployment rate in the coming report, it is likely that the market will also be presented with a slightly disappointing non farm payroll reading and that could mean that no significant shift in overall sentiment will be seen. In short, the trend remains down but the easy money has already been made by the shorts and we think that the remaining downside potential carries with it increasing risk. In fact, those that are short the Dollar index should now consider selling a slightly out of the money put and using that money to purchase protective calls. With some foreign central banks seemingly poised to act against the Dollar, we would not be surprised to see the next new low move repulsed quickly and for the Dollar to begin to rise away from that low into the US holidays in a long term short covering action.

EURO: The upward bias remains in place in the Euro into the opening this morning, as the trade is tossing around the idea that the ECB is also poised to announce steps to eventually exit its quantitative easing efforts. Apparently the trade thinks that the ECB is closer to extracting ultra aggressive easing policies than the US, and unless the US jobs report paints a very up beat picture on Friday, that would seem to be an accurate assumption. However, most traders think that the ECB will still leave rates unchanged today and therefore, the Euro looks to remain in a bullish bias but we have to think that the market will show some respect for the old high of 151.44, as that price is expected to prompt some intervention talk from ECB officials.

YEN: As we indicated early this week, the yen reached what seemed to be an excessive level in face of the Dubai situation last week and since a portion of the trade seems to think that a number of central banks are poised to exit ultra easing policies, one gets the sense that the carry traders are being scared out of positions. Those who took our advice, to buy yen puts, should look to bank a profit on those puts, in the event that the December yen falls down to the 112.00 level.

SWISS: Like the euro, there would not seem be to a reason to end the upward tilt in the Swiss in the trade today. However, we suspect that the Swiss National Bank will view any move to new high ground, as a troublesome development. On the other hand, with the trade generally expecting the ECB to leave rates unchanged today, there would not seem to be a reason to derail the entrenched trend in the Swiss today. Initial resistance is seen at 100.46 today but the bulls look to retain control over the trend in the action today.

POUND: The December Pound did manage another new high for the move overnight before the currency fell back. While the Pound seems to be getting a lift from ongoing bullish action in the equity markets and also because of the news that another US bank is poised to pay back its TARP funds, we are still skeptical of the Pound bull track. However, the trend is pointing up in the Pound but without distinctly favorable macro economic sentiment, the Pound could have difficulty maintaining its upward bias. In short, the Pound bulls might need something positive from the US data over the coming two trading sessions to maintain its upward bias on the charts.

CANADIAN DOLLAR: The Canadian Dollar seems to have lost a bit of upside momentum in the early going today. In fact, the Canadian has begun to forge a series of lower highs on the charts and that would seem to suggest that it needs something more than consistent equity market gains to extend its recent attempt to rally. In fact, the bull camp in the Canadian has to be disappointed with the failure to track tightly with the recent gains in the gold market. We see no reason to call for a slide in the Canadian today but the Canadian probably can’t ignore slightly disappointing economic data from the US in the coming two trading sessions.

TODAY’S MARKET IDEAS: We don’t expect a change in the Dollar trend, but we are entering a window in which the odds of a surprise turn have increased.

Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

DOLLAR: The Dollar has already forged a fresh downside breakout on the charts this morning and that leaves the down trend pattern intact despite signs that the US economy might be gaining some footing. Apparently the currency trade continues to doubt the pace of the US economic recovery and it also doubts that US interest rates are destined to rise anytime soon. It goes without saying that the world sees the push for US health care reform, as an ongoing burden for the deficit. In short, the market bias remains down toward the Dollar and even a measure of economic optimism doesn’t seem to temper the negative track in the Greenback. Not surprisingly, the Dollar showed almost no life in the wake of statements from Geithner overnight that the US wants a strong Dollar. The market also didn’t seem to buy into the Treasury Secretary comments that the US will eventually get its deficit under control. In short, the bear camp doesn’t seem to have any fear of a counter trend move. Near term downside targeting in the December Dollar is seen down at 74.15.

EURO: So far, the Euro hasn’t taken out the October highs, but the Euro has managed to rise above the 150 level, which in recent weeks, was pegged as an extreme exchange rate level by certain ECB officials. Given strong gains in global equity markets again overnight and generally positive economic data flowing from China overnight, that should leave the recovery currencies like the Euro with a definitive edge against the US Dollar. Near term support in the December Euro now moves up to 150.24 and there might be little in the way of significant resistance until the 150.62 level.

YEN: While the Yen managed an impressive range up extension overnight, that move was clearly rejected in a rather aggressive manner. The bull camp has to be disappointed that beneficial Chinese economic data failed to sustain a strong Yen, as that dampens the idea that the Japanese economy is going to draft off the Chinese economy. The yen also continues to show signs of weakness in the face of market environments, that show an increase in risk appetites and therefore we see the overnight highs in the Yen as really significant near term resistance. In fact, we see closer-in resistance in the December Yen over the coming 24 hours to be 111.36.

SWISS: The Swiss is seemingly poised to return to and above the old highs. Apparently the up beat global economic outlook has caused the Swiss trade to toss aside the threat of central bank intervention. After some initial resistance up at 99.71, the December Swiss is probably set to move to an even higher trading range in the coming trading sessions and that should in turn make the old highs critical support.

POUND: The BOE comments overnight seem to have taken the Pound out of the recovery currency mode this morning. In other words, the BOE suggested that their easing efforts are working, but that inflation looks to remain under control in the near term. In a real rally killer, the BOE also suggested that the chance of an absolute disaster had diminished and that clearly prompted traders to stand aside from the Pound to other less risky currencies. In the end, seeing the BOE remain in an excess easing posture, seemed to prompt traders to bank profits on a currency that has had a fairly aggressive run up off the November lows.

CANADIAN DOLLAR: A definitive range up extension in the Canadian Dollar overnight would seem to project the December Canadian back above the 96.00 level in the coming trading sessions. We suspect that ongoing defined down trend pressure in the Dollar and very up beat macro economic views toward the Chinese economy, plays right into the hands of the Canadian Dollar bulls. In fact, we can’t argue against a December Canadian trade of 96.93 in the coming week.

TODAY’S MARKET IDEAS: More down in the US Dollar ahead, with the Canadian, Euro and Swiss the primary benefactors of the currency market trends.