There are those times, however, when one must acknowledge the influence of one variable upon another. That pretty much describes the impact the U.S. dollar has had upon on commodity prices recently—in reverse.
The euro took new ground against the greenback Thursday, reaching an all-time high of $1.43, while other currencies also rallied on concerns about the U.S job market. Investors sought protection from the dollar fallout with bids for commodity futures. Oil and gold especially rallied.
Commodities are often used by traders as a natural hedge against a weakening currency. The greenback is targeted in particular because so many commodities are bought and sold in dollars. As the euro strengthens, for example, oil and gold sell at relative discounts to buyers on the Continent.
The inverse relationship between the dollar and commodity prices shows up in a number of technical indicators. Metrics on the Reuters/Jefferies CRB Index futures and those for the U.S. Dollar Index futures (both traded on the InterContinental Exchange) offer some clues into prevailing trends and possibilities for the future.
|
Technical Indicator
|
CRB Index Futures (Commodity Prices)
|
US Dollar Index Futures (Currency Strength)
|
Likely Consequence
|
|
MACD (Momentum)
|
Bullish |
No indication |
Bearish reversal in dollar looming |
|
ADX (Trend)
|
Strong Uptrend |
Strong Downtrend |
Trends likely to strengthen further |
|
Bollinger Bands (Volatility) |
Overbought |
Oversold |
Conditions may persist before reversing |
Keep in mind that these are indicators only, not promises. In the end, oil and gold are the lead dogs in the raw commodities sector, and set the pace. If price trends for both yellow and black gold reverse, the entire raw commodity complex is likely to be put under pressure. Any rebound, too, in the strength of the dollar could be a harbinger of a setback in commodity futures prices.
Keep your powder, or rather, your oil and gold, dry.
