by Stuart Kaufman

Stocks and commodities rallied early Monday, June 21, on the news that China’s currency, which was viewed as undervalued versus the U.S. dollar, would be allowed to rise. The euro currency initially got a boost, but I think the news won’t outweigh the debt problems in the Eurozone. Natural gas, on the other hand, has some supportive fundamentals on its side.

China’s announcement to move to a more flexible currency regime was seen as a vote of confidence in their domestic economy, and should ease trade tensions and boost commodity consumption in general. However, I think the reaction was probably overdone, as the Chinese will likely be slow in adjusting the currency higher.  We saw the markets reverse some of the moves made after the initial knee-jerk reactions on the news, although it should be mildly positive long-term. Let’s look at the euro outlook.

Euro

The euro currency has rallied off its recent lows as the economically ravaged European countries have enacted austerity measures to stem a negative tide. The news from China helped provide another lift as market participants moved into riskier assets in general. However, the same weakness in the Eurozone persists; countries including Greece, Spain, Ireland and Portugal have severe banking and debt problems that aren’t going away soon.

The initial strength that the September euro futures held during the overnight trading session on Sunday, June 20, eroded during Monday’s session. I think Eurozone problems are likely to continue to surface and for now, rallies should provide shorting opportunities. Eurozone credit spreads have been shrinking, but before a full-scale turnaround can be made in the euro, substantive budget actions will need to be taken.

Unless there is positive news from the Eurozone to match that out of Beijing, look for the September euro futures to have problems returning to the highs reached Sunday night near $1.25. I believe this move was a temporary top. U.S. officials have reacted coolly to the news, believing it was mostly a political measure ahead of the Group of 20 meeting taking place this week. Tariffs may still be slapped on Chinese imports. As far as a trading strategy, I recommend taking advantage of upward moves in the euro by selling the September euro futures at $1.2400, using a protective stop of 125 points.

Looking at the June 15, 2010 Commitments of Traders report from the Commodity Futures Trading Commission, non-commercial traders were net short 55,099 contracts, a decrease of 45,459 contracts from the prior week. Commercial traders were net long 69,973 contracts, a decrease of 30,493 contracts. Non-reportable traders were net short a record 14,874 contracts, an increase of 14,966 contracts which represents a change from a net long to a net short position.

Non-commercial and non-reportable traders combined held a net short position of 69,973 contracts. This represents a decrease of 30,493 contracts in the net short position held by these traders. The report shows the market was overly short, and we saw from covering of those shorts take place Sunday evening and early during Monday’s session on June 21.

Natural Gas

Natural gas has been rallying over the past month as the severity of the Gulf Oil Crisis worsened. Political support has started to grow for the replacement of natural gas over crude oil where possible. The U.S. possesses a tremendous supply of natural gas. Hot weather, the threat of an active hurricane season, and depleting weekly supplies have helped support prices.

At least initially, natural gas didn’t react as strongly as some other commodities from the broad-based euphoria over China. Baker Hughes reported on Friday, June 18, that the number of natural gas operating rigs in the U.S. declined by only one to 953, and to some, that is even somewhat too lofty.

One might expect natural gas to garner more support from talk that hurricane season is finally starting to pick up speed (a tropical storm is headed toward Cuba presently). However, August natural gas futures are starting the week in the middle of a recent consolidation high zone, and it could take a rise and close above $5.24 mmBTU to turn the technical picture bullish. I continue to be long-term bullish natural gas, and traders might consider buying August natural gas futures at $4.477, using a 50-cent stop loss.  More conservative traders might want to focus on strategies with defined risk, such as bull call spreads.

The June 15 Commitments of Traders report for natural gas showed non-commercial traders were net short 76,989 contracts, a decrease of 2,140 contracts from the prior week. Commercial traders were net long 39,136 contracts, a decrease of 5,414 contracts. Non-reportable traders were net long 37,854 contracts, an increase of 3,276 contracts. Non-commercial and non-reportable combined were net short 39,135 contracts, which represents a decline of 5,416 contracts from the prior report.

I remain bullish even in the face of Monday’s reversal. Natural gas is close to filling a gap from June 10, 2010. The market may work lower and form a base, then move to take out the June 16 high near $5.25. Natural gas is a cleaner energy than oil and it could become a very important product in our future.

Please feel free to give me a call if you have any questions on this topic, or how to develop a customized trading strategy based on what’s taking shape in markets of interest to you.

Stuart Kaufman is a Senior Market Strategist with Lind Plus. He can be reached at 800-924-1060 or via email at skaufman@lind-waldock.com.

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