This week's trading action saw crude oil, gold, corn and wheat futures score new all-time highs. The Euro currency also scored new all-time highs against the U.S. dollar this week. Other commodity futures markets this week traded at multi-year highs.
In the meantime, the value of the U.S. dollar hit an all-time low against several of the other major currencies. And the U.S. stock market continued to suffer, as the U.S. is either already in an economic recession, or teeters on the brink of such.
Speculative monies from around the world continue to flow into the long side of the raw commodity futures markets -- especially crude oil and gold -- amid the weaker U.S. dollar, weaker U.S. stock market and worries about the health of financial institutions.
Mature Bull
Indeed, strong price uptrends in the grains, precious metals, liquid energies and other markets are still firmly in place with no early, strong technical signals to suggest market tops are close at hand.
However, many commodity futures markets are mature bull runs -- and arguably very mature. These mature bull markets are fraught with high volatility and the risk at any time of steep downside price corrections in the major uptrends.
Until the near-term price uptrends on the daily charts for those bullish commodity futures markets are soundly negated, traders are still going to view any setbacks as buying opportunities. Even stronger clues that market tops would be in place would be downtrends developing on the weekly charts for those commodities.
Discerning the Markets
Importantly, it has become apparent there is one key market to closely monitor to determine where most of the other markets are heading: the Euro. As the Euro hit a new all-time high against the U.S. dollar this week, the bullish commodity markets followed with strong price surges themselves.
As long as the Euro continues to surge higher (and the U.S. dollar careens lower), the bullish commodity markets are likely to do the same. Keep in mind, too, that the Euro is also in a mature bull market move.
It could also be argued the U.S. dollar is most important currency for traders to watch, via the U.S. dollar index futures. However, the reason I choose the Euro is that it's more liquid in currency futures trading than is the U.S. dollar index futures. And in the cash FOREX trading market, the euro currency-U.S. dollar is a major currency pair traded by FOREX traders.
The Impact of Intervention
There is a phenomenon that could seriously impact the euro and the value of the U.S. dollar in the coming weeks, or sooner. It's coordinated central-bank foreign-exchange market intervention. This phenomenon has not occurred in any significant fashion since the mid-1990s.
Central bank intervention in currency markets occurs when central bankers from the major industrial countries act in unison to try to influence the value of one currency against other currencies -- usually the U.S. dollar.
It has been and still is the official policy of the government of the United States of America to have a "strong dollar." U.S. Treasury Secretary Henry Paulson reiterated such just Thursday. Most economists and analysts would agree that at present, the value of the U.S. dollar vs. the other major currencies could not be considered "strong."
If the U.S. dollar continues to slump (and the euro rise), then what is likely to occur sooner rather than later is more U.S. government officials "jawboning" and trying to talk up the value of the greenback. That tactic is not likely to work.
What comes next would likely be coordinated central bank intervention in the world currency markets -- done by buying or selling huge sums of currencies on the world market. In this case, the central banks would likely dump other major currencies on the world market and buy up U.S. dollars.
The results of central bank intervention in the currency markets are debatable. What has occurred in the past is that shortly after the intervention is announced, the currency markets do react in the fashion the central bankers hoped they would -- usually a rise in the value of the U.S. dollar vs, the other major currencies.
However, then what has happened is the currency speculators become emboldened by the central bank intervention, as they sense the move by the governments is a "last ditch" effort to support a weakened U.S. currency. That has caused the greenback to make one last stab to the downside, but then it does begin a sustained recovery.
Importantly, the history of coordinated central bank intervention that occurred in the early-to-mid-1990s does suggest it's a last major step that occurs just before the U.S. dollar does put in a major low and embark upon an up-trend in value.
The bottom line is that in the coming days or weeks, if you see more pronounced jawboning by U.S. government officials trying to talk up the U.S. dollar's value -- with little result, then you can look for the next step to be coordinated central bank intervention. To likely follow that would be a last and quick jab down in the dollar's value (up in the euro), and then the beginning of a major and longer-term recovery process in the dollar's value.
To extrapolate further, at such time when the U.S. dollar does start to trend solidly higher (euro lower) on the daily chart, then it would likely mean the end of the major bull market runs seen in most commodity futures markets.
At time of publication, Wyckoff had no positions in the stocks mentioned, although positions may change at any time.
Jim Wyckoff is a senior market analyst for TradingEducation.com a free educational Web site. In addition, Wyckoff writes a blog offering current market commentaries every morning on TraderBlogs.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Wyckoff appreciates your feedback; click here to send him an email.
