FOREX WEEKLY REVIEW AND OUTLOOK

Australia dollar and Canadian dollar shined last week on strong rally in commodities and strength in global stocks. Dollar was lower following dovish FOMC minutes as well as disappointing job report. Rally in crude oil and rebound in gold also put some pressure on the greenback. But after all, the weakness against European currencies was limited so far. Japanese yen was generally lower as new Finance Minister Kan expressed his position on a weaker yen. After all dollar's consolidation would likely extend for some time but we'd expect strong broad-based rally after crude oil and gold peak. Meanwhile, Japanese yen would remains soft in near term too but we're also expecting the yen to rebound as selling momentum diminishes.

Although the Fed upgraded forecasts of 4Q09 and 2010 growth outlook, the minutes revealed that policymakers remained concerned about the vulnerability of recovery and the impacts may be caused by removal of stimulus. While announcing the asset purchase programs will end by 1Q10, the Fed did not rule out the possibility of increasing and extending the program should economy weaken. A few members noted that 'resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate'. More in FOMC Minutes – December: Cautious Policymakers Did Not Rule Out Further Asset Purchases.

The highly anticipated non-farm payroll report from US was a disappointment for investors whole look for sustained sign of recovery. It remains people that the road to recovery will be bumpy. Non-Farm Payrolls showed -85k contraction in December versus expectation of 0k. Nevertheless, November's data was revised up to 4k, which was the first expansion since Jan 2008. Unemployment rate was unchanged at 10.0%. Nevertheless, ISM reports released last week was encouraging suggesting that the economy is still growing mildly. ISM manufacturing index rose more than expected to 55.9 in December while ISM services also climbed above 50 to 50.1.

Job market data from some countries were also released last week. Eurozone unemployment rate rose to 10% in December, at 11 year high. Swiss unemployment rate also climbed to 12 year high of 4.2%. Canadian unemployment rate was unchanged at 8.5% but the economy lost -2.6 jobs in December.

Naoko Kan was named new finance minister of Japan as Hirohisa Fujii stepped down on health reason. Kan called for a weaker currency and said he would cooperate with BoJ to guide yen exchange rate to appropriate levels. He even mentioned that such appropriate level in terms trade would be around 95 in USD/JPY. The comments are in sharp contrast to his predecessor, Hirohisa Fujii, who openly said that a strong yen is in Japan's interest. Nevertheless, Kan later moderated his comment by saying that exchange rates should be decided by the markets. Yen was broadly lower last week but selling momentum was so far weak.

BoE left interest rates unchanged at 0.5% and asset purchase program unchanged at GBP 200b as widely expected. No detail was released with the statement and focus will turn to meeting minutes to be published on Jan 20 as well as the Quarterly Inflation Report to be published on Feb 10.

Commodities were noticeably strong last week with CRB index rose to as high as 293.75. The development provided strong support to Australian dollar and Canadian and limited rebound of the greenback against European majors. Crude oil finally managed to break through 82 high and have the medium term rally from 33.2 resumed. Strength in oil should carry on in near term to upper trend line resistance at 83/84 level, or even further to 90 psychological level before topping.

On the other hand, Gold's corrective rebound from 1075.2 has also expected to as high as 1141 last week. Such rebound is likely still in progress for 61.8% retracement of 1227.5 to 1075.2 at 1169.3.

Development in commodities will continue to pressure the greenback and favor Aussie and Loonie. Nevertheless, as mentioned before, the overall outlook is dollar was not that weak. Indeed, recent price actions in EUR/USD, USD/CHF and GBP/USD are clearly corrective in nature. Same picture is seen in dollar index. While the consolidation from 78.45 might extend further and another fall to below 77.09 cannot be ruled out. We'd continue to expect downside to be contained by 38.2% retracement of 74.19 to 78.45 at 76.82 and bring rally resumption. Medium term fall from 89.62 should have completed at 74.19 already and we'd expect rise from there to extend to 89.62 and will target 38.2% retracement of 89.62 to 74.19 at 80.08 in the least bullish scenario.

The Week Ahead

Dollar will likely remains soft initially this week as strength in commodities continues. Nevertheless, the greenback could stage a strong rebound if rally in commodities shows fatigue and pulls back. Main events are scheduled towards the end of the week. ECB rate decision will be a major highlight but there might not be any surprise from the meeting as ECB will keep rates, as well as the tone, unchanged. From US, Fed's Beige Book, retail sales, CPI and industrial production will be closely watched. Meanwhile, Australian employment report would also be important in extending recent rally in Aussie.

* Monday: Swiss retail sales; Canadian housing starts
* Tuesday: UK RICS house price balance, trade balance; Canada trade balance; US trade balance
* Wednesday: UK industrial and manufacturing productions; Fed Beige Book
* Thursday: Australia employment, ECB rate decision; US retail sales, import prices
* Friday: Eurozone CPI; US CPI, Empire state manufacturing, industrial production, U of Michigan consumer sentiment

AUD/USD Weekly Outlook

AUD/USD rose strongly to as high as 0.9264 last week. The development left fall from 0.9404 to 0.9734 in three wave corrective structure which indicates that the pair has not topped yet. With an intraday top in place at 0.9264, some sideway trading might be seen initially this week but downside should be contained by 38.2% retracement of 0.8734 to 0.9264 at 0.9062 and bring rally resumption. Above 0.9264 will target 0.9404 resistance be beyond.

In the bigger picture, the corrective three wave structure of fall from 0.9404 to 0.8734 suggests that whole medium term rise from 0.6008 is still in progress. Break of 0.9321 resistance will confirm this case and target a test of 0.9404 first. Break will then target 08 high of 0.9849. On the downside, though, break of 0.8734 support will revive the case that whole medium term rise from 0.6008 has completed and will turn outlook bearish for deeper correction towards 0.7702/0.8626 support zone.

In the longer term picture, as noted before, long term correction from 0.9849 has likely completed at 0.6008 already, after being supported slightly above 76.4% retracement of 0.4773 (01 low) to 0.9849 (08 high). Rise from 0.6008 is possibly developing into a new up trend which extend the long term rise from 0.4773. We'll continue to favor the long term bullish case as long as 0.7702 support holds and expect an eventual break of 0.9849 high. However, a break of 0.7702 support will firstly argue that whole rise from 0.6008 has completed. Secondly this will open up the case that AUD/USD is in phase of a long term consolidation and will gyrate in the large range of 0.6008/0.9849 for some time.

GBP/JPY Weekly Outlook

GBP/JPY's choppy price actions continued last week, first dipping to 145.96 then recovers. So far, there is no change in the view that price actions from 139.96 are merely consolidations to the fall from 163.05, with the choppy rise from 139.26 as the third leg. At this point, there is no confirmation that the rise from 139.26 has completed yet. Initial bias is mildly on the upside for 150.68 and break will target 153.21 resistance. On the downside, though, below 147.03 will flip intraday bias back to the downside. Further break of 145.96 support will confirm that whole rise from 139.26 has completed and will target a retest of this support next.

In the bigger picture, medium term rebound from 118.18, which is a correction to the long term down trend from 07 high of 251.90, has completed at 163.05 already. Fall from 163.05 is expected to resume after sideway consolidation from 139.69 completes and should target a new low below 118.81. However, note that sustained break of 61.8% retracement of 163.05 to 139.26 at 153.96 will argue that fall from 163.05 has finished already and will in turn indicate that rise from 118.81 is still in progress to another high above 163.05 before conclusion.

In the longer term picture, fall from 251.09 is treated as resumption of multi decade down trend. Note that the fall from 215.87 is not treated as the fifth wave, but the third wave inside the third wave that started at 241.35. On resumption, the down trend will extend to 61.8% projection of 215.87 to 118.81 from 163.05 at 103.03 next, which is close to 100 psychological support.

EUR/JPY Weekly Outlook

EUR/JPY edged higher to 134.11 last week but continued to face selling pressure ahead of 134.54 resistance. Another rise cannot be ruled out for the moment, but loss of momentum, as seen in bearish divergence conditions in 4 hours MACD and RSI, will likely limit upside to 134.54. Hence we'll stay neutral for the moment. On the downside, break of 131.24 support will indicate that rise from 127.50 has completed and should flip intraday bias back to the downside for 126.88/127.50 support zone. This will also affirm the case that whole decline from 138.47 is still in progress for another low below 126.88. On the upside, however, sustained trading above 134.54 will in turn indicate that whole fall from 138.47 has completed and the current rise from 127.50 could then extend further to upper end of medium term range near to 139.21 resistance.

In the bigger picture, at this point, EUR/JPY is still bounded in medium term range between 126.88 and 139.21 and outlook remains neutral for the moment. On the downside, a break of 126.88 support will revive that case that medium term rebound from 112.10 has completed at 139.21 already and down trend from 169.96 is resuming. In such case, we'd expect deeper fall to 112.10 and beyond to resume the long term down trend. On the upside, however, break of 134.54 resistance will revive that case that recent price actions are merely consolidations to medium term rise from 112.10 already and another high above 139.21 should be seen before EUR/JPY tops.

In the long term picture, up trend from 88.96 (00 low) has completed at 169.96 and made a long term top there. Subsequent price actions are either developing into resumption of the multi decade down trend from 285.56, or wide range corrective pattern. In either case, upside should be limited well below 169.96 high and we're expecting at least one more medium term fall after the current rise from 112.10 completes. The final structure of the rebound from 112.10 will provide more indication on whether a test on 88.96 low would be seen.

EUR/CHF Weekly Outlook

EURCHF's fall extended further to as low as 1.4742 last week and met mentioned target of 100% projection of 1.5138 to 1.4894 from 1.4988 at 1.4744. Initial bias remains on the downside this week and sustained trading below 1.4744 will bring deeper decline towards next key support level at 1.4577. On the upside, above 1.4827 minor resistance will indicate that an intraday low is formed and bring consolidations. But after all, break of 1.4988 resistance is needed to indicate that EUR/CHF has bottomed. Otherwise, outlook will remain bearish and another fall should be seen after consolidations.

In the bigger picture, with EUR/CHF still staying well below 55 weeks EMA, fall from 1.5880 is likely still in progress. Current decline should have a test on 1.4577 support first and break will target 2008 low of 1.4315. On the upside, break of 1.5007 support turned resistance is needed be the first signal to indicate that fall from 1.5446 has finished and revive the case that 1.4577 is still in progress. Otherwise, medium term outlook will remain bearish.

In the long term picture, the corrective three wave structure of the rise from 1.4391 to 1.6827 is arguing that fall from 1.6827 is resumption of long term down trend from 1.8234. EUR/CHF's failure to take out 55 weeks EMA suggests that whole fall from 1.6827 is still in progress. A break of 1.4577 support will affirm this case and bring another low below 1.4315 to resume the long term down trend.

EUR/GBP Weekly Outlook

EUR/GBP continued to stay in converging range last week and there is no change in the outlook. Another fall is still expected as long as 0.9053 resistance holds. Below 0.8921 minor support will flip intraday bias back to the downside for 0.8833/55 support zone first. Break there will confirm that whole decline from 0.9410 has resumed for 61.8% projection of 0.9410 to 0.8833 from 0.9153 at 0.8786 next. On the upside, however, break of 0.9053 resistance will argue that EUR/GBP might have bottomed out at 0.8833 already and stronger rally should then be seen to 0.9153 resistance first.

In the bigger picture, at this point, we're still favoring the case that medium term correction from 0.9799 has completed with three waves down to 0.8399 already. Rise from 0.8399 is possibly resuming the long term up trend. Hence, fall from 0.9410 is viewed as a correction only and should be contained by 0.8704 support. Break of 0.9053 will suggest that correction from 0.9410 has completed and rise from 0.8399 is resuming for a test on 0.9799 high first and then 61.8% projection of 0.6535 to 0.9799 from 0.8399 at 1.0416.

However, break of 0.8704 support will argue that firstly, rise from 0.8399 has completed at 0.9410 already. Secondly, this will indicate that fall from 0.9410 is likely the third leg of the correction pattern that started at 0.9799 and could extend beyond 0.8399 support before the whole correction concludes.

In the long term picture, long term up trend in EUR/GBP might be resuming as correction from 0.9799 has completed at 0.8399. Decisive break of 0.9799 high will confirm this bullish view and target 261.8% projection of 0.5680 to 0.7258 from 0.6535 at 1.0666. Break of 0.8704 will delay the bullish view but we'd still expect the long term up trend to resume sooner or later as long as 0.8186 support holds.

USD/CAD Weekly Outlook

USD/CAD's fall extended further to 1.0296 last week as correction from 1.0851 continued. Initial bias remains on the downside this week and further decline could still be seen. Nevertheless, we'd expect the pair to continue to lose downside momentum in next fall and downside should be contained above 1.0205 to conclude the correction from 1.0851 and bring reversal. Above 1.0408 minor resistance will flip intraday bias back to the upside. Further break of 1.0576 resistance will suggest that rise from 1.0205 is resuming for another high above 1.0851 resistance.

In the bigger picture, a medium term bottom might be in place at 1.0205 with bullish convergence conditions in daily MACD. As noted before, fall from 1.3063 is viewed as a correction to long term rise from 0.9056. Such correction might have already completed with three waves down to 1.0205 already (1.0784, 1.1732, 1.0205). Break of 1.0851 resistance will confirm this case and target 61.8% retracement of 1.3063 to 1.0205 at 1.1971 at least. On the downside, however, break of 1.0205 will invalidate this view and bring down trend resumption to parity instead.

In the longer term picture, the three wave structure of the fall from 1.3063 to 1.0205 revived the case that it's a correction to rise from 0.9056. Sustained trading above 61.8% retracement of 1.3063 to 1.0205 at 1.1971 will indicate that whole rise from 0.9056 might be resuming for another high above 1.3063.

AUD/USD Weekly Outlook

AUD/USD rose strongly to as high as 0.9264 last week. The development left fall from 0.9404 to 0.9734 in three wave corrective structure which indicates that the pair has not topped yet. With an intraday top in place at 0.9264, some sideway trading might be seen initially this week but downside should be contained by 38.2% retracement of 0.8734 to 0.9264 at 0.9062 and bring rally resumption. Above 0.9264 will target 0.9404 resistance be beyond.

In the bigger picture, the corrective three wave structure of fall from 0.9404 to 0.8734 suggests that whole medium term rise from 0.6008 is still in progress. Break of 0.9321 resistance will confirm this case and target a test of 0.9404 first. Break will then target 08 high of 0.9849. On the downside, though, break of 0.8734 support will revive the case that whole medium term rise from 0.6008 has completed and will turn outlook bearish for deeper correction towards 0.7702/0.8626 support zone.

In the longer term picture, as noted before, long term correction from 0.9849 has likely completed at 0.6008 already, after being supported slightly above 76.4% retracement of 0.4773 (01 low) to 0.9849 (08 high). Rise from 0.6008 is possibly developing into a new up trend which extend the long term rise from 0.4773. We'll continue to favor the long term bullish case as long as 0.7702 support holds and expect an eventual break of 0.9849 high. However, a break of 0.7702 support will firstly argue that whole rise from 0.6008 has completed. Secondly this will open up the case that AUD/USD is in phase of a long term consolidation and will gyrate in the large range of 0.6008/0.9849 for some time.

USD/CHF Weekly Outlook

USD/CHF's choppy correction continued last week and dipped further to 1.0215 last week. Further decline is still mildly in favor as long as 1.0383 resistance holds but after all, we'd expect downside of the consolidation to be contained by support zone of 1.0175 and 61.8% retracement of 0.9916 to 1.0506 at 1.0141 and bring resumption of rise from 0.9916. Above 1.0383 will argue that the correction has finally completed and will flip intraday bias back to the upside for 1.0506 first and then 1.0590 medium term support turned resistance next.

In the bigger picture, medium term fall from 1.1963 has completed with five waves down to 0.9916 already, on bullish convergence condition in daily MACD. Also, the three wave consolidation from 1.2296 should also be finished too. Current rise from 0.9916 is expected to extend further to medium term trend line resistance first (now at 1.1021). Sustained trading above the trend line will affirm the case that long term rise from 2008 low of 0.9634 is resuming for another high above 1.2296. On the downside however, a break of 0.9959 support will invalidate this bullish view and argue that medium term down trend in USD/CHF is still in progress for 0.9634 low.

In the longer term picture, a long term bottom is no doubt in place at 0.9634 with bullish convergence condition in daily MACD. USD/CHF failed to take out 55 months EMA and reversed again and thus gives no confirmation of long term reversal yet. We're neutral in the long term outlook for the moment and would wait for further evidence from the markets before making a stance.



GBP/USD Weekly Outlook

Despite edging lower to 1.5896, subsequent rebound suggests that GBP/USD's consolidation from 1.5829 is still in progress. Initial bias is mildly on the upside for 1.6237 resistance, and possibly further to 100% projection of 1.5829 to 1.6327 from 1.5896 at 1.6304. But upside should be limited below 61.8% retracement of 1.6875 to 1.5829 at 1.6475 and bring resumption of the whole fall from 1.6875. On the downside, below 1.5896 will flip intraday bias back to the downside for 1.5829 first. Break there will indicate that fall from 1.6875 has resumed and should target 1.5706 key cluster support.

In the bigger picture, we're still favoring the bearish case that medium term rebound from 1.3503, which is is treated as a correction to down trend from 2.1161, has completed at 1.7043. Firm break of 1.5706 cluster support (38.2% retracement of 1.3503 to 1.7043 at 1.5691) will confirm this case and indicate that whole down trend from 2.1161 is likely resuming for a new low below 1.3503.

However, note that sustain break of 61.8% retracement of 1.6875 to 1.5829 at 1.6475. will in turn indicate that whole fall from 1.6875 has completed and recent price actions from 1.7043 are merely consolidations to the larger rise from 1.3503 only. That is, whole medium term rise from 1.3503 might not be finished yet and another rise could still be seen to 1.7332/8236 (50% and 61.8% retracement of 2.1161 to 1.3503) before completion.

In the longer term picture, the corrective nature of the multi-decade advance from 1.0463 (85 low) to 2.1161 as well as the impulsive nature of the fall from there suggests that GBP/USD is now in an early stage of a long term down trend. Rebound from 1.3503, which is treated as correction in the larger down trend, should be limited by resistance zone of 1.7332/8236 and bring down trend resumption towards 1.4063 low. We'll hold on to the bearish view as long as 1.8236 fibonacci level holds.


USD/JPY Weekly Outlook

USD/JPY rose further to as high as 93.74 last week but upside momentum was rather unconvincing with bearish divergence conditions in 4 hours MACD and RSI. the pair should continue to lose momentum even in case of another rise, as it approaches medium term trend line resistance at 95.08 and 55 weeks EMA at 94.21. On the downside, break of 92.08 minor support will indicate that a short term top is formed. Further break of 91.24 support will argue that whole rebound from 84.81 has completed and should bring deeper fall towards 87.36 support for confirmation.

In the bigger picture, at this point, USD/JPY is still trading below medium term trend line resistance at 95.06 and 55 weeks EMA at 94.21. Hence, there is no clear indication of reversal yet. A break of 87.36 support will indicate that rebound form 84.81 has completed and the whole fall form 124.13 is possibly resuming for 1995 low of 79.75. However, note bullish convergence condition is seen in weekly MACD. Sustained trading above the medium trend line resistance will be the first signal of medium term reversal and in such case, focus will turn to 101.43 resistance for confirmation.

In the long term picture, fall from 124.13 is still in progress after breaking out of the long term triangle pattern and a test on 79.75 low made in 1995 should be seen. The structure of the current fall from 101.43 will be important to determine whether 79.75 will be taken out decisively. Acceleration of the current fall from 101.43 will build up downside momentum which should then pull monthly MACD away from the signal line and will indicate that fall from 124.13 is resuming the multi-decade down trend. However, loss of downside momentum in the coming fall will indicate that it's possibly just part of a long term sideway pattern from 79.95 and strong support should be seen after breaching 79.75 to conclude the medium term fall.


EUR/USD Weekly Outlook

EUR/USD continued to gyrate in range above 1.4217 last week as consolidations continued. With 1.4256 support intact, such consolidations might continue further and another rise cannot be ruled out. But after all, we'd still expect upside to be limited by 38.2% retracement of 1.5143 to 1.4217 at 1.4571 and bring resumption of fall from 1.5143. Break of 1.4256 support will suggest that such fall is resuming and should target 38.2% retracement of 1.2329 to 1.5143 at 1.4068 next.

In the bigger picture, medium term rise from 1.2456 has completed at 1.5143 on bearish divergence conditions in daily MACD. Focus now turns to 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will also confirm the case that three wave consolidation from 1.2329 has finished at 1.5134 too. In other words, whole medium term term fall from 1.6039 should be resuming for a new low below 1.2329. On the upside, above 1.5143 resistance is needed to invalidate this view. Otherwise, outlook will now remain bearish.

In the long term picture, the lack of impulsive structure of the rise from 1.2329 argues that it's the second wave of the wide range correction that started from 1.6039. Another medium term decline could still be seen to 1.2329 and below. Break of 1.1639 support is possible based on 100% projection of 1.6039 to 1.2329 from 1.5143. But downside will likely be contained by 61.8% retracement of 0.8223 to 1.6039). After all, the long term up trend from 0.8223 is set to resume after completing the three wave medium term correction from 1.6039.

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GOLD AND OIL REPORT

The 2 most important events happened last week were PBOC's issuance of bills at a higher rate as well as disappointing US employment report. Commodity prices advanced earlier in the week but pared some gains after the 'negative' news. The Reuters/Jefferies CRB Commodity Index soared +2.6% to 290.77.

PBOC (China's central bank) offered RMB 60B worth of 3-month bills at 1.3684% in its weekly open-market operation Thursday. This can be interpreted as a form of 'rate hike' as it had been keeping the yield at 1.3280% since August 2009. The move indicates that China would continue to guide market interest rates higher and absorb liquidity from the market through issuance of central bank notes. Earlier this week, the PBOC declared that it would strike a balance between providing liquidity support to maintain relatively fast growth and controlling hyper-inflation. Therefore, managing an appropriate pace of credit growth is the central bank's focus this year. That said, the central bank reiterated that the monetary policy will continue to be 'appropriately loose' so that the market should not be overly worried about tightening.

On Friday, the Labor Department reported that the number of payrolls dropped -85K, compared with market expectation of no change, in December. Unemployment rate stayed at 10%. The report had mixed impact on commodities (esp. energy and base metals). On one hand, the weaker-than-expected report suggested economic recovery was not as smooth and fast as previously anticipate, This was negative for commodity demand, hence, for price. On the other hand, reduced speculations for an early rate as a result decline in payrolls triggered selloff in USD. This was positive for commodity prices.
Crude Oil

Despite briefly breaking below 82 after disappointing non-farm payrolls data, crude oil managed to recover and close at 82.75, up +0.1% Friday. The benchmark contract surged +4.3% last week.

Abnormally cold weather in the Northern hemisphere boosted oil demand and drove energy prices higher in the beginning of 2010. Not only WTI crude oil price breached 2009-high at 82, gasoline and heating prices also recorded prominent gains. On the macro front, economic data continued to show recovery which in turns suggesting demand improvement. Although things look nice apparently, supplies remain ample and demand is still weak. We worry that oil prices will face deep correction once weather returns to normal.

After decline for 4 weeks in December, crude oil inventory rose +1.3 mmb to 327.3 mmb in the week ended January 1. For oil products, gasoline stockpile increased again, up +3.74 mmb, after dropping modestly in the previous 2 weeks while decline in distillate stockpile decelerated to only -0.23 mmb. Worse still, demands were much weaker than December and stayed at historic lows.

The dramatic decline in crude oil price from the peak at 147.27 in July 08 found a bottom at 33.2 in January 09. Since then, crude oil has rallied almost every month. On annual basis, WTI crude gained +78%. As we mentioned in previous articles, pure fundamentals did not justify the massive gain and a price level above 80. A large extent o f the rally have priced in expectation of future demand recovery.

The crisis in 2008-09 was termed as the worst recession since World War II. Undoubtedly, it must have very significant impacts on different markets, including commodities. As the recession and recovery have dominated movements of various assets, correlations between markets have reached exceptionally in high in 2009. In particular, commodities were moving in tandem with stocks and inversely with USD. However, we believe these patterns will fade in 2010 as commodity prices will be influenced more by industry-specific factors (such as supply demand, inventory) and less by macroeconomic outlook.

After declining for 2 years, oil demand should increase in 2010. According to the US Energy Department (EIA), world oil demand should increase +1.3% to 85.219M bpd in 2010. In fact, EIA's demand forecast has risen from the bottom of 84.39 M bpd in May, indicating its increasing bullishness on the market. Other agencies also expect demand to increase in 2010. Taking an average of forecasts of EIA, IEA and the OPEC, oil demand will increase to 85.5M bpd in 2010 from 84.44 a year ago.

On the supply side, non-OPEC production is expected to increase slightly, by +0.3M bpd, to 51.12M bpd in 2010. Deceleration in the pace of increase in non-OPEC production is due to lower growth in the US and FSU. Without quota constraints, OPEC NGL production should rise further. Consensus forecasts it to increase to 5.49M bpd in 2010 from 4.86M bpd in the prior year. The forecasts suggest that 'call on OPEC will increase slightly to 28.94 M bpd from 8.73M bpd. According to OPEC's December report, total OPEC production reached 29.077M bpd in November, suggesting the cartel will need to increase quota compliance while fell sharply to 60% in November, 09 from 80% in 1Q09.

Oil's strength in 2009 was largely driven by anticipation better demand outlook in 2010. It's true that demand should improve this year. However, seeing the whole demand/supply picture, OPEC's production remains a critical factor in determining price. According to OPEC officials, the optimal compliance level is 75-80%. Should this rate be accomplished, the market would definitely be tightened and oil price should go higher. However, spare capacity remains a concern. EIA forecast spare capacity in OPEC will reach 4.24M bpd in 2010. It is highly likely that OPEC members will be tempted to ignore quotas and increase production as oil price rises.

Natural Gas

Extremely cold weather also sent gas price to as high as 6.108 Thursday. However, less-than-expected decline in gas inventory and unexpected decline in US payrolls snapped gains and gas price plummeted to 5.749 at close. The benchmark contract rose +3.2% on weekly basis.

Stockpiles of natural gas dropped -153 bcf to 3123 bcf in the week ended January 1. Analysts hd anticipated inventory to fall more than -200 bcf owing to cold weather.

According to the US Energy Department, gas production probably rose +3.7% in 2009 due to minimal hurricane disruptions and significant growth in production from onshore shale basins. Similar trend is expected to continue in coming few years. IEA warned, in its annual energy report, of an 'acute glut' due to weaker than expected demand and plentiful US unconventional supply.

LNG supply is increasing as it is one of the cleanest types of fuels and can be transported in vessels. EIA expects that US LNG imports will increase to 1.7 bcf per day in 2010 with the expected completion of additional global LNG supply projects.




Precious Metals

Despite initial retreat to 1119.5, gold price rebounded strongly as weak employment report reduced speculations for an early Fed rate hike. The benchmark contract closed at 1138.9, up +0.1% and +3.8% on daily and weekly basis. While an earlier-than-expected tightening of US monetary policy is an important downside risk for the yellow metal, we do not expect things will materialize in the first half of the year. That is, gold price should be able to go higher in the medium-term.

While fundamentals will be the major drivers for most commodities this year, gold price will still be, to a large extent, driven by investment demands. In 2009, bullion attracted strong investor interest as USD slumped, expectation for inflation increased and central banks built up their gold reserves.

Official sector has been net gold seller over the past 2 decades. However, things have changed in 2009 as several central banks (mostly from emerging markets) announced gold purchases while sales by European central banks were minimal. It's possible that official sector will become net gold buyer In 2010.

China announced it had increased its gold reserve to 1054 metric tons in April 09 while Russia has been accumulating gold in the past 3 year. The Russian central bank purchased 88 metric tons of gold In the first 10 months of 2009 and news reported it would buy 30 metric tons in December 09.

November was the best month for the yellow metal in 2009 as it set fresh nominal records for 15 out of 21 trading days during the month and recorded the largest percentage increase since September 1999. In November, the IMF announced it had sold 200 metric tons of gold to the Reserve Bank of India. This was the first time since 1995 that India bought gold and the total purchase represented half of IMF's total planned sales of 403.3 metric tons. Shortly after this, the IMF said that the central bank of Mauritius and the central bank of Sri Lanka had bought 2 metric tons and 10 metric tons of the rest of gold, respectively. Buying from central banks in emerging countries indicated a growing appetite for bullion holdings and spurred speculations for further central bank demand.

Silver, platinum and palladium should be less affected by interest rate movement given their applications in industrial activities. Particularly for PGMs, improvements in auto sales in the US, Japan and China are supportive for prices as auto-catalysts take up 60% of platinum and palladium demands. Last week, PGMs glittered with platinum surging +6.8% to 1570.6 and palladium gaining +4% to 425.2.

Base Metals

Earlier in the week, most metals in the complex reached highest levels in more than 1 year amid strong manufacturing data in China and the US. Moreover, severe weather condition weighed on prices as production may be disrupted by heavy snowfall. However, prices tumbled amid speculations for monetary tightening in China.

As in 2009, outlook for base metals is divergent in 2010. We believe copper will perform the best while aluminum the worst. Copper has a tighter supply picture as ore grades are falling and there's lack of investment in mining. For aluminum, inventory remains abundant and re-opening of smelters will further boost support. China may return to a net exporter of aluminum in 2010 after being a net importer in 2009 for first time in 7 years.

GOLD REPORT:

Gold's choppy rebound from 1075.2 continued last week and extended further to 1141. Further rise is still expected as long as 1119.5 minor support holds and Gold could now be targeting 61.8% retracement of 1227.5 to 1075.2 at 1169.3. On the downside, howeve,r break of 1119.5 will suggest that such recovery has completed already and will flip intraday bias back to the downside for retesting 1075.2 support instead.

In the bigger picture, rise from 681 is expected to develop into a set of five wave sequence with first wave completed at 1007.7, second wave triangle consolidation completed at 931.3. Rise from 931.3 is treated as the third wave and has possibly completed at 1227.5 after missing 100% projection of 681 to 1007.7 from 931.3 at 1258. Deeper pull back could now be seen to 1026.9/1072 support zone, or even further to retest 1000 psychological level. But downside should be contained well above 931.3 support and bring up trend resumption to another high above 1227.5.

In the long term picture, rise form 681 is treated as resumption of the long term up trend from 1999 low of 253 after interim consolidation from 1033.9 has completed in form of an expanding triangle. Next long term target is 100% projection of 253 to 1033.9 from 681 at 1460 level. We'll hold on to the bullish view as long as 931.3 structural support holds.

CRUDE OIL REPORT:

Crude oil finally broke 82.0 resistance to resume the medium term rally and stayed firm above this level. While some sideway trading might be seen in initially this week, outlook will remain bullish as long as 80.79 support holds. Recent rise from 68.59 is expected to resume sooner rather than later towards upper trend line resistance at 87/88 level. On the downside, break of 80.79 will argue that a short term top might be formed with bearish divergence condition in 4 hours MACD and deeper pull back could be seen before another rise.

In the bigger picture, the break of 82.0 resistance confirms that whole medium term rise from 33.2 has resumed. Nevertheless, there is no change in the view that it's a correction to fall from 147.27. Hence, we'd continue to look for reversal signal as crude oil approaches 50% retracement of 147.27 to 33.2 at 90.24, which is close to 90 psychological level. However, break of 68.59 support is still needed to confirm that rise from 33.2 has completed. Otherwise, outlook will be neutral at worst even in case of deep pull back.

In the long term picture, there is no change in the view that fall from 147.27 is part of the correction to the five wave sequence from 98 low of 10.65. While the rebound from 33.2 is strong and might continue, there is no solid evidence that suggest fall 147.27 is completed and we're still preferring the case that rebound from 33.2 is merely a corrective rise only. Having said that, strong resistance should be seen between 76.77/90.24 fibo resistance zone and bring reversal for another low below 33.2 before completing the whole correction from 147.27.


SILVER REPORT:

Silver's rise from 16.765 extended to as high as 18.525 last week and is now pressing 61.8% retracement of 19.50 to 16.78 at 18.46. Further rise is still in favor initially this week as long as 18.055 minor support holds. Sustained trading above 18.46 fibo resistance will indicate that whole fall from 19.50 has completed at 16.765 after drawing support from 38.2% retracement of 12.435 to 19.50 at 16.80. In such case, further rally should be seen to retest 19.50 high first. On the downside, however, failure at the current level, followed by break of 18.055 minor support will suggest that rebound from 16.765 has completed and will flip intraday bias back to the downside for retesting this support first.

In the bigger picture, the stronger than expected rebound from 16.75 dampens the view that silver has topped out 19.50 and revives the possibility that rise from 12.435 is still in progress. Nevertheless, note that whole medium term rise from 8.4 is is treated as part of the long term, wide range, consolidation pattern that started at 21.44 back in Mar 08. Hence, even in case of another rise, upside is expected to be limited inside this 19.55/21.44 resistance zone and bring another medium term fall. On the downside, break of 16.765 support will revive the case that silver has topped out in medium term and will bring deeper decline towards lower medium term trend line at 14 level.

In the longer term picture, the up trend from 01 low of 4.01 topped out at 21.44 and subsequent price actions are treated as correction/consolidation to this up trend. Fall from 21.44 completed after drawing support form 8.5 key level. However, subsequent rally from 8.4 is not displaying a clear impulsive structure and hence, we'd prefer the case that it's just the second wave of the wide range consolidation pattern. Another medium term fall should still be seen for retesting 8.5 before completing the consolidation. Nevertheless, strong support is still expected at 5.45/8.5 support zone to conclude the consolidation.

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