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Strong Dollar Creates Headwinds for Commodities

David Becker
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Strong Dollar Creates Headwinds for Commodities

One of the most consistent intermarket relationships is the inverse relationship between commodities and the dollar. By comparing the CRB Index of nineteen commodity markets to the U.S. Dollar Index they clearly moved in opposites directions. The first four months of the year show a falling dollar coinciding with rising commodities. As the dollar bottom in early May, the the commodity rally was halted.

The CRB Index is trading at the lowest level in six months, while the USD has reached a 10-month high.

The 60-day Correlation Coefficient has shown negative correlation all year. A negative correlation means that the two indices move in opposite directions. The dollar rally may be predicated on the belief that U.S. rates will rise faster than foreign rates over the next year. The fact that U.S. bond yields are higher than those in the Eurozone and Japan also makes the dollar a stronger bet than the Euro or the yen.

After a strong first half, commodity prices are coming under a lot of selling pressure. Two of the hardest hit groups are agriculture and energy. The PowerShares Agriculural ETF is seen peaking in late April and tumbling to the lowest level since February. Those losses were due mainly to good growing conditions which pushed grains and cotton sharply lower. The PowerShares Energy ETF is seen peaking in late June and tumbling to the lowest level since April. Crude oil dropped from $107 a barrel to $97 during that period, nearly a 10% loss. One of the side effects of falling food and energy prices is keeping inflation at a lower level, which also has a depressing effect on bond yields. Industrial metals have held up much better than other commodities during that period. A rising dollar is another reason for the commodity selloff.

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