Commodities: the recovery continues

The commodities sphere has had an impressive recovery of late and is approaching a key resistance level. After falling for most of the last 10 months the general commodity index, the Thomson Reuters/ Jefferies index, bottomed at the end of June and is now close to its 200-day moving average.

This index is made up of 19 commodities and the weightings are as follows:

Energy: 40%
Agriculture: 40%
Industrial metals: 13%
Precious metals: 7%

The performance of this index shows the broad-based recovery in the commodity sphere in recent weeks as the dollar has given up gains and oil prices, in particular, have picked up. In the last week or so the recovery has spread to precious metals with both gold and silver clawing back some losses.

The significance of a pick-up in commodities:

The inverse relationship between commodities and 10-year Treasury yields has strengthened in recent weeks. At the start of the year the correlation between the CRY and 10-year Treasury yields was an insignificant -20%, however, since the 14th July this has surged to- 80%. Thus, if commodities can extend their gains, Treasury yields may fall and this may put downward pressure on the dollar.

NB: Over the weekend the Federal Reserve announced that it was reviewing allowing banks to trade physical commodities. A decision has not been made, but it sparked fears of forced liquidation and the potential for a decline in commodity prices. This has not yet played out, but it is a risk. If the Fed does ban banks from trading in physical commodities we could see them sell off sharply.

Takeaway: watch commodities to get a grip on what the dollar and US yields are doing. If the dollar can find its feet then we could see commodities start to struggle.

Source: Forex.com

29.07.2013