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 retreats to 1.0750 area as USD recovers
EUR/USD stays under modest bearish pressure and trades slightly below 1.0750 in the European session on Wednesday. Hawkish comments from Fed officials help the US Dollar stay resilient and don't allow the pair to stage a rebound.
GBP/USD drops below 1.2500 ahead of Thursday's BoE event
GBP/USD stays on the back foot and trades in negative territory below 1.2500 after losing nearly 0.5% on Tuesday. The renewed US Dollar strength on hawkish Fed comments weighs on the pair as market focus shifts to the BoE's policy announcements on Thursday.
USD/JPY surges to near 155.50 as Fed expects to prolong policy rates
USD/JPY extends winning streak amid hawkish sentiment surrounding the Fed’s stance on monetary policy. Fed's Kashkari anticipates the prolonging of elevated rates and suggests that further rate hikes are not entirely ruled out. The Japanese Yen depreciated despite the potential for intervention by Japanese authorities.
Gold stays near $2,310 as US yields edge higher
Following a quiet Asian session, Gold retreated slightly to the $2,310 area. Hawkish tone of Fed policymakers help the US Treasury bond yields edge higher and make it difficult for XAU/USD to gather bullish momentum.
WTI remains on the defensive around $78.00 amid signs of easing supply tightness, stronger US Dollar
Western Texas Intermediate, the US crude oil benchmark, is trading around $78.00 on Wednesday. The black gold edges lower due to a stronger US Dollar and signs of easing supply concerns. Oil traders will shift their focus to the EIA Crude Oil stockpiles report due later on Wednesday.