How the Dollar Affects Commodity Markets

by Matt Roma

The U.S. dollar has been a driving force in this year’s commodity bull-run and the dollar remains weak. If you trade commodities, you have to keep your eye on the dollar to have an understanding of why other commodity prices move the way they do.

Influenced by the dollar, crude oil has been a driving factor in many markets. Higher crude prices typically have a negative affect on the stock market. Higher crude prices also lead to higher prices of other goods and services that are byproducts of crude oil.

Crude oil’s strong bull-run is being fueled by two main components: demand and the dollar. The demand from India and China obviously has propelled the market in the past couple years, and I don’t think this demand will go away any time soon.

Some people are trying to pick tops in this market, but I think we’ll continue to see crude oil rally to $155-$160 a barrel.

Crude oil is priced in dollars, so the weak dollar has also bolstered prices of crude oil in recent years. The dollar has been in a bear market for some time. The U.S. Dollar Index is a weighted average of six major currencies against the U.S. dollar, and trades as a futures contract on ICE Futures U.S. The index hit 72.35 on July 2, which could mark a double-bottom.

 The Federal Open Market Committee’s decision to keep rates steady at its policy meeting on June 24-25 was not surprising. The most important message from the Fed was that inflation remains high. I would expect interest rates to be raised later this summer to fight off inflation. We should see rate hikes by the end of the year. I would recommend using Dollar Index calls to position yourself for a rally when those rate hikes do come.

This dollar is important to a lot of commodity markets. The European Central Bank (ECB) will meet Thursday, July 3, to decide whether or not to raise its interest rates. It’s widely expected it will increase rates to 4.25 percent to curtail inflation. If that happens, I expect the dollar to decline and the euro to rally. That could result in a run-up in commodity prices, including crude oil, which seems to be a new vehicle for inflation hedging. By raising rates in Europe, we could see the FOMC raise rates in between regular meetings to prop up the dollar and address inflation in the United States.

Grains

The quarterly USDA June acreage and grain stocks report on June 30 had a significant market reaction. The 87.327 million acres planted in corn that were reported was higher than expected. Corn was limit down on June 30 because of the report. December corn futures traded near $7.58 a bushel on July 2. Look to get long if prices retreat to the $7.35 level, where I see support. 

 

Soybeans traded near $16.05 a bushel on July 2, down 4.25 cents. I think soybeans will move higher, and won’t see a top until $17 or $18, depending on how much momentum we have to the upside. 

 
Softs

Sugar traded near 13.76 cents a pound on July 2 and I think we’ll test 15 to 15.50 cents a pound area on the next run up. 

 

Coffee traded near $1.5575 a pound on July 2. The market was in consolidation between $1.30 and $1.40, and once the market broke out of this range, it headed above $1.50. I think this market could hit $1.70 - $1.75 by the end of the summer.

Feel free to give me a call for more details on specific trading strategies to suit your account size and risk tolerance.

Matt Roma is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at mroma@lind-waldock.com.

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