The continued rise in commodity prices after their recent fall depends on the ability of the dollar bears to push the greenback below a key support level it reached on Wednesday. Commodities and equities saw intra-day selling in the US markets after the dollar touched support and rallied.
Since commodities move inversely to the dollar, bears will have to break the current support level of 76-76.75 (dollar index) for commodities to continue their rise after the recent decimation. The dollar index measures the greenback against a basket of six major currencies. The slight reversal in the dollar index resulted in the Dow falling from its intra-day high. The Dow rose nearly 200 points on Wednesday but closed just 100 points up after the dollar rose from the support level.
Other commodities, too, were affected. Gold, which hit an intra-day high of nearly $1,695 per troy ounce, fell to a low of $1,677 on the greenback rally. Silver, too, saw its rally fizzle out from a high to $33.10 to $32.60. Copper, on the other hand, stayed flat and did not react to the rise in the dollar on Wednesday.
It is important to remember that the dollar continues to be at the centre of the financial world. It is the hub that has been moving the spokes, the multiple financial assets. Also, a small move in the hub leads to an out-sized move in the spokes. So, it is important for commodity traders to keep an eye on the support and resistance levels of the dollar as those can lead to a turn in other markets too. And, a small move in the dollar can create a larger move in commodity prices.
For instance, from August 29 to October 4, which is the recent low and high of the dollar index, the greenback rallied 8.5 per cent. However, the S&P 500 fell 12.75 per cent in the same period. Gold peaked a little later on September 6 and fell nearly 18 per cent by October 4. Silver, in a similar period, dropped a whopping 35 per cent. Crude oil dropped 16.5 per cent and copper fell 28 per cent in the same period.
Now let us look at the fall in the dollar from October 4 to October 12. The dollar index fell 3.8 per cent, but the S&P 500 rallied 13 per cent, silver rose 16 per cent, gold 6 per cent, crude oil 13 per cent and copper 13.5 per cent. It is very clear from this that dollar moves have a disproportionately large impact on other asset classes.
Given this, and the fact that the dollar index has fallen to the support level and will likely begin to rally, equity and commodity bulls should become cautious. Note that the dollar is on an uptrend and the fall since October 4 could only be correction, before the greenback rallies again. In case the support level of 76-76.75 holds on the dollar index, it can rally again by 3.8 per cent to reach its October 4 high. Once that high is cleared, the next target on the dollar index would be 81-81.50, which is a 6 per cent rally and can wreak havoc on the commodity market. At the very least, commodity and equity bulls should book some profits. Bears, on the other hand, can take some short positions on commodities and equities. However, if the dollar index fails to hold support and falls, we will see a rally in commodities.
The author is based in Chicago and is the editor of
www.capturetrends.com
