This morning I want to stress that, at least in my opinion, based on the developing patterns in oil, metals, gold, the euro and the Aussie dollar, and besides the debt-related rogue waves that are out there, I see the Dollar Index at the beginning of a long rally for months to come into 2010 that could carry the index above its March high of 89.62.
Since Nov. 25, Dubai, through its subsidiary Dubai World, is in some kind of a de facto default situation. Greece’s sovereign debt has now been downgraded by Fitch. Yesterday, Standard & Poor’s downgraded Spain’s credit outlook to negative while the Baltic countries, Latvia and Lithuania, remain under serious “downward pressure,” says Fitch, and are edging closer to default.
Ireland, Portugal, Italy, and Iceland remain in dire straits. I can’t imagine these situations won’t put negative pressure on the euro and in balance favor the dollar. Defaults will continue to pile up and because of that demand for dollars has to rise.
There is a tremendous rising need, too, for dollars to pay down and cancel debts (that is, deleveraging) as well as to increase capital reserves everywhere. From a technical standpoint, I can say that my short-term positive expectations on the Dollar Index will not change as long the 74.17 low of Nov. 26 remains intact. This does not, however, mean that I don’t expect a substantially weaker dollar in the longer term.
And then we have Mexico, which has just hedged its oil at $57 per barrel for the totality of its 2010 net oil exports. By the way, this “insurance” has a price tag of more than $1 billion to guarantee them a minimum of $57 per barrel in 2010.
The big question here is what do they see or expect what most don’t see or expect. Keep in mind that Mexico has an extremely good record of hedging its future oil prices. Mexico around mid-2008 hedged its 2009 output at $70 per barrel, which was considered at that time as an extremely contrarian hedge when oil prices skyrocketed towards $150 per barrel.
Well, their audacious (or wise) hedge has generated them this year a net profit of $5 billion.
So, does Mexico expect a fall in demand for oil or do they expect a rise of the dollar? As far as I’m concerned, I’m convinced of the latter but, of course, time will tell.
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