US Dollar: Is The Rally Finally Over?
No doubt about it, the commodity story for the second half of 2014 has been the collapse in the oil market. As you’re likely aware, West Texas Intermediate (WTI) crude has plunged to $75 a barrel in recent trading. That’s a far cry from the $100 it traded at in late July.
Of course, oil isn’t the only one hurting…
Gold broke to a new 52-week low at $1,130 an ounce a few days ago. Once the yellow metal cut through important technical support at $1,200, sellers completely overtook the market.
And that’s not all…
Looking at one-month returns across the commodity space, you’ll find a slew of poorly performing assets. Coffee, cocoa, silver, cotton, platinum, palladium, and a handful of other hard assets are deep in the red on a one-month basis.
What’s causing all this commodity bearishness?
… the US Dollar.
As you can see, the greenback started another leg higher in mid-October after an already stunning July-September rally. Remember, the Dollar and commodities tend to trade inversely. When the greenback rises, commodities performance generally suffers.
But take a look at this…
As you can see from this long-term chart, the mid-2014 rally has pushed the Dollar index to the highs set in 2009 and 2010.
Without question, this is an extremely important technical resistance level.
What should you expect from this level?
If commodity bulls are going to have a chance, the US Dollar must turn lower from the 88 resistance level (red line). Should the currency fall in coming days, expect bulls to return to the commodity space in force.
However, if the Dollar rallies through 88, it’s going to be tough sledding in commodities for some time to come. You see, once this important level is overtaken, there’s little stopping the currency from moving to higher ground.
Bottom line…
There’s no question the rising US Dollar has wreaked havoc on commodities in the second half of 2014. But with the currency trading at important long-term resistance, now may be the perfect time to take a low-risk bullish stance on the commodity asset class as a whole.
Until Next Time,
Justin Bennett
Category: Commodities
