Commodities Week Ahead: Potential USD Profit-Taking Spells Boon
Investing.com | Jul 23, 2018 03:16AM ET
Last Friday's unexpected tumble in the dollar may be a precursor to further USD declines that could lift energy, metals and agricultural futures this week, putting non-currency fundamentals to greater test.
With nearly all of the world’s major commodities priced in the dollar, the currency arguably wields more influence than warranted in their market direction: i.e. a stronger dollar equals weaker demand for raw materials, and vice versa. While a natural resource’s price is determined by manufacturers, consumers and investors’ need for it versus supply, the dollar’s relative strength/weakness against the euro and yen often distorts the picture. The ongoing US trade war with China and Europe is creating another anomaly for commodity prices, keeping things like copper below fair value, said analysts at Citigroup.
After hitting one-year highs on Thursday, the dollar index, measured against a basket of six major currencies, ended the week with its biggest one-day drop since June 29. Commodity prices went the other way, with US crude oil, copper, gold and corn futures rising between 1% and 2% each on the day, though most ended the week lower from sharp losses registered earlier in the week.
The dollar slumped after Donald Trump cut its forecast for 2019 to $1,100 an ounce, lower than the $1,250 it had given for this year.
Phillip Streible, senior market analyst at Chicago brokerage RJO Futures, said that while he liked the idea of buying US gold futures for October at $1,250 calls, he wasn’t sure when the yellow metal would recover. “Trump’s comments are not going to stop the Fed from raising interest rates,” he added.
Supply Hurting oil; Agricultural Trades in Play
In oil, worries over increased global supply are likely to face off with positive sentiment from any dollar weakness.
The Latest figures from the Vienna-based Organization of the Petroleum Exporting Countries showed Saudi output in June rose to levels not seen since 2016. In the US, oil production reached 11 million barrels per day for the first time last week as the country has added nearly 1 million bpd in production since November, thanks to rapid increases in shale drilling.
The US West Texas Intermediate and UK Brent crude contracts logged their third straight weekly loss last week, despite gaining from the dollar’s tumble on Friday.
Agricultural markets may be better poised to benefit from USD’s decline, according to Boynton Beach, Florida-based Hackett Financial Advisors, which closely follows the sector.
“We think that by August, the (dollar’s) top will be complete and lead to an accelerated move down into fall, adding a bullish tail wind to ag commodity markets,” said Shawn Hackett, founder and lead analyst for the advisory. “This is further supported by a smart money buy signal in the key commodity currencies algorithm.”
Hackett’s favorite picks for near-term agricultural winners include wheat, coffee, sugar and lean hogs.
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