Grain traders took profit as the strong dollar reduced export demand. Crude oil held up very well despite worries about demand and the risk of rising supply. Commodities traded lower during the week where the stronger dollar left many markets bruised
Ole Hansen
Commodities traded lower with the stronger dollar and reduced inflation worries delivering a blow to the sector. Precious metals led by silver took the biggest hit while coppers strong momentum since March also faded.
Grain traders took profit as the strong dollar reduced export demand. Crude oil held up very well despite worries about demand and the risk of rising supply.
Commodities traded lower during the week where the stronger dollar left many markets bruised.
The Bloomberg Commodity Index, which tracks a basket of major commodities spread evenly across energy, metals and agriculture, traded lower by 3.2 per cent with energy, due to strong gains in natural gas, being the only sector strong enough to put up a fight against the adverse impact of the stronger dollar.
The dollar rose to a two-month high against the euro as risk adversity returned.
This was in response to a continued rise in coronavirus cases around the world together with infighting in Washington raising doubts about Congress’ ability to push through another stimulus package.
The negative dollar view that had been growing in recent months had particularly, according to positions in the futures market, been expressed through a near-record euro long.
The break below €1.1700, therefore, created some nervousness about a deeper correction which hurt markets with an elevated bullish positioning in particular, such as precious and industrial metals. Silver slumped and has now already clocked up two +20 per cent corrections since almost hitting $30/oz just six weeks ago. Wild swings like these have left a trail of battered investors, thereby raising some doubts about the metal’s ability to move higher.
While the dollar has yet to show signs of topping out, sentiment did try to improve ahead of the weekend.
Despite the stand-off over Trump’s plans to nominate a replacement for the Supreme Court in the last weeks before what could become an ugly election, Democrats caught on the backfoot by Trump’s recovery in the polls, are drawing up plans for a new but relatively small $2.4 trillion stimulus and Trump’s Secretary of Treasury Mnuchin made positive comments on the prospects for negotiations. Gold dropped below $1900/oz but managed to find support ahead of key support at $1837/oz, the 38.2 per cent retracement of the March to August rally.
Silver, which as mentioned recorded its second bear market (a 20 per cent movement from the recent peak), saw its relative value against gold tank to a near two-month low.
In the short-term, both metals will be facing some headwinds from the recent drop in inflation expectations leading to rising real yields as well as the strong dollar and the recent high correlation with stocks, which may cause it to continue to trade nervously ahead of the November US election.
(The writer is Head of Commodity Strategy at Saxo Bank)
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