Price of Raw Materials Continues to Increase

China's Vice Premier offered some much needed words of comfort for the euro overnight when he reflected that China "has taken concrete action to help some EU member counter the sovereign debt crisis". Talking on the actions taken to date, he further stated that: "We hope these measures will quickly produce results". The euro jumped half a big figure on the comments. On the face of it, the reaction has more to do market trading on thin volumes and little else to get excited about. Nevertheless, the tone of the comments was comforting for the euro, especially when compared to the barrage of criticism the euro area is more used to. China matters, not least because it holds nearly 30% of global fx reserves and, whilst we do not know the proportion held in euros, we do know it wants to increase it over time and also that it has been a buyer of peripheral euro-zone debt in the past.

No stopping the boom in commodity prices. Little wonder that commodity-based currencies continue to strengthen, with the price of raw materials continuing to advance on the first day of the new week. Copper prices remain right around record highs above $9,000 a metric ton; eight years ago, copper traded at around $1,500 a ton. Raw sugar rose another 3% yesterday to 33.5c per pound, a 30yr high. The oil price continues to climb gradually, now up to $91.4 a barrel. Two years ago, it was trading at just $33. Of interest is that long positions in commodities have climbed enormously in recent months; indeed, traders are now more optimistic on commodities than they were prior to the financial crisis in 2008.

Record holdings in Gold ETFs. We were pointing out last week the divergence between the normally inverse relationship between global (10Y) real interest rates and gold prices. The rise in real rates would normally be accompanied by falling gold prices if the relationship seen most of this year was to hold in place. In contrast, gold prices have held up. This looks to be more down to investors flows, with data in both the US and Europe showing large-scale selling of bond funds. At the same time, the rise in ETF gold holdings is indicative of continued strong investor's appetite, even as the gold price completes its tenth consecutive annual percentage gain.

Keep a close eye on Korea. There is a sense that tensions have eased a touch overnight, with reports that North Korea has agreed to let inspectors visit its uranium enrichment plant. This comes after Monday's fire drill exercise by the South Koreans on the disputed Yeonpyeong Island ended without retaliation from the North. The North has threatened that it would respond with even more force than the November 23rd attacks, so the air of tension remains. The US is playing the diplomat as best it can, with former US envoy Bill Richardson in Pyongyang over the weekend pleading with the North not to respond. How well Richardson succeeds remains to be seen - with 28K troops in South Korea, it is clear which side the US is on. In South Korea itself, there is a growing fear that war with the North is increasingly inevitable, and furthermore that both China and the US could well get dragged in to a dispute that neither wants. South Korea has detained eight Chinese fishermen after their boat allegedly collided deliberately with a patrol ship, in an incident that has an eerie parallel with one that took place a couple of months back involving Japan. It is not uncommon for Chinese fishing boats to be detained by South Korea's coastguard.

Bank of Japan steers a steady course. There was little surprise to see steady rates and no further policy measures from the end of the two-day meeting. In its statement, it reflected that the economy seems to be pausing, this being the message from the latest quarterly Tankan survey. It retains its commitment to keep rates at zero until it can see prices rising and, with little sign of that, we can expect rates to remain on hold for a long time to come.

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