A Quick Note On Commodities & The US Dollar
As a general guide it's always helpful to know that Commodities have an inverse relationship to strong DXY flows.
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Just a couple of questions coming in to the chat right now about the moves we're seeing in some of these markets, looking at commodities specifically.
The upside we're seeing in gold, the upside we're seeing in silver, the upside we're seeing in oil markets. And the main driver for these moves in today's session has definitely been the US dollar.
Now even though each of these commodities, whether it is gold, that has a strong correlation to real interest rates, or whether it is copper that has a strong correlation to global demand, all of these commodities will, of course, have their own idiosyncratic correlations, apart from the US dollar. But they do, over time, have a very strong inverse relationship and correlation to the US dollar.
And where we see the US dollar losing ground, especially a lot of ground versus its major counterparts, we usually see strong strength coming in to commodity prices. Now whenever we see a strong dollar rebound, or a big, broad-based dollar strength coming in against its major counterparts, we normally see across the board, commodity weakness.
Now a key reason for this has to do with the dollar's reverse status, or reserve status rather, and the fact that commodities are mostly traded in US dollars. So whenever the value of the dollar goes down, the thing that commodities are priced in, it means that there's more buying power, and because it requires less dollars to buy those specific commodities.
So if just take a look at this basic chart, which is the dollar index, and gold versus copper, oil prices and gold. We can see as the downside in the dollar accelerated, with the hopes of reflation, as that reflation narrowed they've started to grip hold of the market.
We also saw that inverse upside move in commodity prices across the board. Now again, each of these will have their own idiosyncratic drivers that drives them in the short as well as the longer term, but generally speaking, strong moves in the US dollar will have that inverse moves in commodity markets as well.
And you guys know we've been eyeing this very strong support area for the dollar for a while now, coming in at that 95, 70 now after breaking convincingly at this key support, shouldn't be a surprise really to see oil markets also breaking out to the upside with that inverse correlation in mind.
Again, not perfect, sometimes these correlations don't work as great as today's example, but it's always a very important correlation to always be very mindful of, especially when there's that medium term expectations for overall broad-based dollar weakness, or broad-based dollar strength as a theme in the markets.
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There’s a link below were you can learn more about it
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
Just a couple of questions coming in to the chat right now about the moves we're seeing in some of these markets, looking at commodities specifically.
The upside we're seeing in gold, the upside we're seeing in silver, the upside we're seeing in oil markets. And the main driver for these moves in today's session has definitely been the US dollar.
Now even though each of these commodities, whether it is gold, that has a strong correlation to real interest rates, or whether it is copper that has a strong correlation to global demand, all of these commodities will, of course, have their own idiosyncratic correlations, apart from the US dollar. But they do, over time, have a very strong inverse relationship and correlation to the US dollar.
And where we see the US dollar losing ground, especially a lot of ground versus its major counterparts, we usually see strong strength coming in to commodity prices. Now whenever we see a strong dollar rebound, or a big, broad-based dollar strength coming in against its major counterparts, we normally see across the board, commodity weakness.
Now a key reason for this has to do with the dollar's reverse status, or reserve status rather, and the fact that commodities are mostly traded in US dollars. So whenever the value of the dollar goes down, the thing that commodities are priced in, it means that there's more buying power, and because it requires less dollars to buy those specific commodities.
So if just take a look at this basic chart, which is the dollar index, and gold versus copper, oil prices and gold. We can see as the downside in the dollar accelerated, with the hopes of reflation, as that reflation narrowed they've started to grip hold of the market.
We also saw that inverse upside move in commodity prices across the board. Now again, each of these will have their own idiosyncratic drivers that drives them in the short as well as the longer term, but generally speaking, strong moves in the US dollar will have that inverse moves in commodity markets as well.
And you guys know we've been eyeing this very strong support area for the dollar for a while now, coming in at that 95, 70 now after breaking convincingly at this key support, shouldn't be a surprise really to see oil markets also breaking out to the upside with that inverse correlation in mind.
Again, not perfect, sometimes these correlations don't work as great as today's example, but it's always a very important correlation to always be very mindful of, especially when there's that medium term expectations for overall broad-based dollar weakness, or broad-based dollar strength as a theme in the markets.
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If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
