US Dollar Assault: Will Commodities Continue Suffering?
From a commodity bull’s perspective, 2013 isn’t turning out to be all that stellar. Fact is, the majority of commodities are currently trading lower than where they started the year.
Take a look at the Reuters/Jeffries CRB Index and you’ll see exactly what I mean…
In case you’re unaware, the CRB Index reflects the average performance of a basket of important commodities. Energy, grains, industrial metals, livestock, softs, and precious metals- they’re all in there. And as you can clearly see, the CRB is trending lower this year.
Why are commodities as a whole so weak?
Let’s get the obvious out of the way first. Each commodity that makes up the CRB Index has its own underlying supply/demand backdrop. And in the case of certain assets, especially softs, supplies are heavily outweighing demand. For example, coffee and sugar are currently trading near multi-year lows thanks to burdensome supply metrics.
But another big reason commodities are down is their trading relationship to the US Dollar…
As you may know, there’s a long-standing inverse correlation between the dollar and commodities. In other words, when the greenback rises, hard assets usually fall.
Take a look…
Here’s the same CRB chart with the US Dollar thrown in (green line). Notice how the greenback is going up while commodities are headed south. In some cases –like gold and silver- the divergence from the dollar is getting extreme.
Clearly, a strong dollar is having a negative impact on commodity performance this year.
The question now is- where do the greenback and commodities go from here?
For an answer, let’s take a closer look at a dollar chart…
As you can see, the greenback has been on quite a roll since early February (red arrow). Rumors of Ben Bernanke and the Federal Reserve tapering off their third round of quantitative easing (QE) have dollar bulls gaining steam.
But as you can see, the recent spate of bullishness has pushed the dollar to a very important technical resistance level at 84 (red line).
And that marks a very important inflection point…
If bulls can push the dollar above this level, it’s likely that commodities will remain weak for some time to come.
However, if there’s any sign that Ben Bernanke isn’t going to cut QE3 short, bears may use the 84 resistance level as a prime area to take control.
Bottom line…
Pay close attention the US Dollar in coming weeks. How it reacts to the red line in the chart above will give investors insight as to how commodities trade going forward.
Until Next Time,
Justin Bennett
Category: Commodities
