THE COMMODITIES MARKET
Technical Overview
Big picture
THEMES AFFECTING Commodities
Commodities Explained
The chart on the left depicts an international flagship, the S&P WCI, a commodity index investors use to protect themselves against inflation. The Index is world-production weighted and consists of the most tradable commodities across 3 major sectors: Agriculture, Energy and Metals, providing greater insight into the performance of international commodity markets.
Intermarket analysis starts by assessing where we are now in the big picture and move down, in which stage we are in by looking at turning points in the different asset classes (bonds, stocks and commodities).
Commodities take leadership usually in inflationary times, as a hedge against inflation. Moreover, gold also carries important psychological weight as a hedge against economic uncertainty.
A bottom and rise in copper prices -considered a barometer of economic health- may be bearish for bonds and for utilities which are interest rate sensitive.
The price of energy, more than a psychological effect on the inflation picture, has also an important impact on the economy: rising oil represents a tax on the economy and has the unfortunate result of slowing prospects for economic growth, which in turn results in lower interest rates and higher bond prices.
Commodities and the USD
The next chart on the left depicts another benchmark, the U.S. Dollar Index, a currency index investors use to protect themselves against currency risk. A strong price movement in the dollar is often inversely correlated with commodities, since they are priced in USD.
Commodity groups
Similar to the industry sectors in equity markets, the commodity complex is made of several groups, each providing a different message to the big picture.
In the precious metals group you find gold, silver, platinum, and palladium. Copper, which is primarily used for industrial purposes (and therefore has much less liquidity), is usually lumped into this category. This group is very popular among Forex traders because of the widespread believe metals hold some kind of monetary value.
Among the energy group, oil is the one prone to supply shocks, political tension in oil producing countries or regions, OPEC policy, and volatile demand from emerging countries, resulting in large amounts of risk for those venturing to trade this market. Higher oil prices don’t help equities either, raising the awful prospect of higher inflation and slower growth.
Grain prices fluctuate on the so-called crop year. The planting and harvesting of the crops form tradable price cycles which nevertheless can be very challenging due to weather conditions. To the commodity group called agriculturals belong corn, soybeans, wheat, and oats which are covered regularly on this page.
Another commodity complex is formed by coffee, orange juice, cocoa, sugar and cotton, the so-called soft commodities. Commodities, and specifically the metals group, are non-perishable assets and as such they are also considered tangible assets. Tangible assets include also equities and real estate in contrast with bonds which are debt related investments.
An advantage to precious metals, specially silver and gold, is that they have the same specifications in different nations, whereas there are differences between Texas and Brent crude oil. They are also movable (and so equities), whereas, real estate there is the risk of tax increases and the geopolitical risk in some areas.
GOLD SPOT - DAILY CHART
US DOLLAR INDEX - DAILY CHART
PALLADIUM - CHART
WTI OIL- DAILY CHART
Commodity Currencies
Commodity currencies are said to be correlated with the price of commodities. The Australian dollar, the Canadian dollar and the New Zealand dollar are considered commodity currencies because the economies backed by the named currencies are sensitive to commodity valuations. In this light, be sure to factor in the global economic outlook when evaluating any of the commodity currencies. In any case, correlation is not causation and such relationships can and do break down.
AUD/USD SPOT - 60 MIN
AUD
Being China a tremendous consumer of raw materials, and Australia a leading exporter of metals, coal and grains, market perceptions of strong demand from China could see the Australian dollar gain in sympathy with commodity prices. The boom in Asian regional growth over the past decade has supported the Australian economy, bringing with it higher levels of inflation. This explains why the RBA maintained higher interest rates than other major central banks.
Visit a dedicated AUD/USD page.
CAD/USD SPOT (RECIPROCAL)- 60 MIN
CAD
Canada is the fifth largest gold producer and fourteenth largest oil producer. Thereby, strong commodity prices generally benefit domestic producers and increase their income from exports. There is a caveat, though, and that is the positive correlation makes the Canadian dollar more expensive in USD terms. Since Canada's economy is very dependent on external demand from the United States, a strong CAD could filter into reduced demand for Canadian Exports.
Visit a dedicated USD/CAD page.
NZD/USD SPOT - 60 MIN
NZD
New Zealand is primarily an agricultural-commodity-producing economy (dairy products and meat in particular), and therefore it displays a weaker correlation than CAD and AUD to metal and energy prices. But still, it is highly sensitive to global performance, especially of its key trading partners, Australia, United States and Japan. It's commodity currency status is also to be understood via its dependency on the Australian economy, and since Australia is very commodity driven, any changes affecting the Australian economy affect New Zealand as well. Against the Japanese yen, the NZD can bee regarded as a risk barometer.
HOW BULLISH ARE COMMODITY CURRENCIES AND THE USD AGAINST A BASQUET OF 21 WORLD CURRENCIES?
The Bullish Percentage Index compares the four majors against the 21 most traded currencies (accordingly to the BIS stadistics). Among these currencies there is the Korean Won, the Mexican Peso, the Turkish Lira, the Brazilian Real, etc. It shows the percentage of currency crosses on buy signals on Point and Figure charts. Point and Figure charts have the particularity to be objectively bullish or bearish, depending by the most recent double-top/bottom buy or sell signal. The Bullish Percentage Index is a breadth indicator used in stock indices, and its logic has been adopted by FXStreet.com to measure currency strength.
The index can be read as an oscillator, with readings between 0% and 100%. It is updated on a daily basis, on GMT close, and compared to the same data 5 days ago.
Latest Commodities Analysis
Editors' picks
EUR/USD looks depressed ahead of FOMC
EUR/USD followed the sour mood prevailing in the broader risk complex and plummeted to multi-session lows in the vicinity of 1.0670 in response to the data-driven rebound in the US Dollar prior to the Fed’s interest rate decision.
GBP/USD drops below 200-DMA, at cross-roads to resume downtrend
The Pound Sterling reverses its course against the US Dollar, after extending its gains past the 200-day moving average (DMA). However, data from the United States (US), showing that inflation could be picking up, as shown by the Employment Cost Index (ECI), bolstered the Greenback. Therefore, the GBP/USD trades at 1.2517 down by some 0.36%, after hitting a daily high of 1.2563.
USD/JPY recovers as traders buy the dip
USD/JPY rebounds after the heavy sell-off on Monday. US Dollar traders are buying the dip after possible intervention by the authorities pulled USD/JPY down. The interest rate differential between Japan and the US is likely to maintain a bullish pressure on the pair.
Gold pullbacks on rising US yields, buoyant US Dollar as inflation heats up
Gold prices drop below the $2,300 threshold on Tuesday as data from the United States show that employment costs are rising, thus putting upward pressure on inflation. XAU/USD trades at $2,296 amid rising US Treasury bond yields and a stronger US Dollar.
WTI remains on the defensive below $82.50 amid Israel-Hamas peace talks, Fed rate cut expectations
Western Texas Intermediate, the US crude oil benchmark, is trading around $82.20 on Tuesday. The black gold edges lower as ceasefire talks between Israel and Hamas in Cairo alleviated the fear of a broader conflict in the Middle East.