If nothing else last week’s US dollar sell-off is telling us that the higher US dollar trade is starting to become a bit of a crowded one, but judging by yesterday’s rebound it is a trade that is continuing to pressure commodity prices in particular, even if the euro is enjoying a brief respite. In the absence of imminent action to cut production by OPEC, oil prices sank like a stone yesterday with US and Brent oil prices hitting their lowest levels since early 2009, while natural gas prices also slid back sharply to levels last seen in early 2012. Metals prices also came under pressure with iron ore prices slipping further below $40 a ton and with no evidence of a base in sight, this in turn is likely to turn the screws further on a highly leveraged mining sector. At the beginning of this year Sam Walsh CEO of Australian giant Rio Tinto asserted that the prospect of $30 a ton iron ore was in the realms of fantasy land, and would never be reached. Given that we are now $9 away this fantasy could well be about to turn into a nightmare. Further losses across the commodity complex are also starting to reveal dislocations in stock markets with US markets sliding back along with the FTSE100, while European markets found a little bit of traction after last week’s late sell-off, on the back of a slightly weaker euro, and comments from ECB President Mario Draghi that sought to clarify the caution displayed by the ECB last week. While last week’s US payrolls report appears to have more or less put the cherry on a US rate rise next week, there must surely be some nagging worries amongst some US policymakers about the speed and extent of the commodity price sell-off and its consequences on the inflation outlook for the US economy. How can they possibly be confident that inflation can return to target when commodity prices are getting routed across the board, irrespective of what Fed policymakers Lockhart and Bullard claimed yesterday, about conditions being right for a rise in rates. While investors appear to have made up their minds about the next move in US monetary policy this week’s Chinese economic data could well prompt further action from the People’s Bank of China, in the coming weeks, creating further monetary policy divergence between the two largest global economies. We start off with the latest Chinese trade data for November which shows that both internal and external demand still remain fairly weak. While a large part of the decline in imports is down to declines in commodity prices, the fact that there was an improvement should be reflected later in this week’s November retail sales numbers on Saturday and reinforce the recent positive narrative of record breaking spending patterns around Chinese singles day. Chinese exports showed a decline of 6.8%, worse than expected but imports while still weak, declined 8.7%, much better than the 18.8% decline seen in October and better than the expected decline of 11.8%, suggesting that domestic demand may well be on the mend. In the UK we saw a surprise rebound in UK manufacturing PMI in October after a weak Q3, so it will be particularly noteworthy to see if this rebound is reflected in the official ONS stats. Normally there is little correlation between the two and given the problems in the steel industry reported in the last couple of months expectations are for manufacturing and industrial production numbers for October to disappoint. Manufacturing in particular is expected to show a drop of 0.8%, while industrial production is expected to rise 0.1%. While these weak numbers are likely to reinforce the narrative behind the Bank of England’s caution about UK interest rates, if the US does raise rates next week, it will make it that much easier for the Bank of England to be slightly more hawkish, when it comes to managing expectations about the path of UK rates as we head into next year. EURUSD – last week’s daily and weekly reversal could well signal a turnaround for the euro with the low potentially in place. We need to hold above 1.0800 to avoid a retest of 1.0720 but ultimately could well be set for a move through 1.1000 on the way back towards 1.1120. GBPUSD – last week’s rebound to the 1.5160 level has prompted a bit of a pullback but as long as we can hold above 1.4980 we could well retest the 1.5300 level in the near term. A move below 1.4880 suggests a retest of the lows at 1.4565. EURGBP – the euro surged through the 0.7080 level last week spilling over to the 0.7240 level pulling back 50% of the losses from its October highs at 0.7493. While above the 0.7080 level we could well see further gains towards 0.7300. USDJPY – currently finding support above the 122.20 area and resistance at the 124.00 area. Above the 124.00 area suggests the possibility of a move through to the August highs at 125.30. Only a move below the 121.80 area would delay the prospect of this scenario unfolding. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. 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