Dollar and Base Metals

It is true that all commodities now a days are priced in US Dollar. Logically one can deduce that if US Dollar rises then certainly commodities prices would fall. However it seems that the relation is not all that linear as one might think. Actually a correlation study from Jan 2006 to Oct 2015 shows at best a negative correlation of max -0.3290 for Copper and a -0.2096 for Nickel, that is a weak correlation.

This means if Dollar starts rising, it doesn’t at all mean that the base metals group will see immediate fall and the opposite is true. Although Major moves in the USD Index (.DXY), which is a composite of rates of several currencies against USD, do induce a change in mood within Base Metals.

Quick notes and observations for your reading pleasure:

  • USD Index topped in July 2001 and had a major change in direction and continued to make new lows until finally bottomed in Feb 2009
  • All Base Metals started rising during that period and some even a year or two before 2001.
  • During the period when USD Index was making new lows (Falling):
    • Zinc topped in Nov 2006 (compared to USD continuing its down trend till Feb 2009)
    • Nickel topped in Sep 2007
    • Copper went into topping mode on May 2006 (8800) and then formed another top in June 2008 (8880) and then after the 2008 crash (2825), made another marginally new high in Feb 2011 (10170), two years after USD had bottomed.
    • Aluminium had its first top in May 2006 (3310) and made another marginally new high (3380)
  • While All base metals were having a run from End 2008/Early 2009 the USD Index was trading in a range going up and down. Over the periods from 2006 to 20015 at times the USD Index and Base Metals where moving in same direction for short periods especially at beginning or end of a new long term trend.

So the relation is not all that linear, and certainly it doesn’t mean that if USD is falling then automatically commodity prices will start rising. It also doesn’t mean that when USD makes new lows and highs that commodity prices would make a new highs and lows.  The correlation that exists is a rather weak one even on timing. It is more a general indicator than a specific one. From the events listed above, one might note as well that commodities, or at least the base metals group, has been leading indicator as to potential turns in the direction of the USD.

In my next article I will be presenting my long term view on USD Index and why I believe that Base Metals and Commodities in General will be changing direction over the next few years.

Interesting Correlations

Performing a simple correlation study on various indices and the group of LME Base Metals, I have noticed a particularly interesting relation between European stocks, (English FTSE (.FTSE), French CAC 40 (.FCHI), Eurostoxx 50 (.STOXX50E) , Italian Index (.FTMIB), Swiss Market Index (.SSMI))  marked in red, and the Base Metals group. Interestingly the European indices had higher correlation factors than what traditionaly has been seen as commodity dependent economies marked in Blue (Toronto Stock Exchange Index (.GSPTE), Australia Stock Exchange Index (.AXJO), Russian Stock Exchange Index (.IRTS), South African Johannesburg top 40 Index (.JTOPI)).However, most Interesting is that Shanghai Stock Composite (.SSEC) has one of the lowest correlation factors among the group of indices.

 

BaseMetalIndicesCorr

 

The study included data from 02 Jan 2006 to 19 Oct 2015. English FTSE had the highest correlation to base metals among all indices included in the study. The highest correlation factor of 0.5215 is between copper and English FTSE, indicating that copper and FTSE have a fairly positive correlation and the two instruments tend to rise and fall simultaneously.

That said, this however doesn’t imply that the amplitude of the rise and the fall is the same. I have noticed that only the periods coincide. FTSE has been rising from June 24th 2013 to August 2nd 2013, Copper was rising from June 25th to August 16th 2013. Another recent examples FTSE began to fall from 27th April 2015 into August 24th 2015 and copper started its descend on May 5th and weirdly bottomed on August 24th 2015. Although both instruments in these two examples given were on longer term different trends.  Meaning if FTSE makes a new high or low it doesn’t mean Copper will do the same, it only means that it will likely go in a similar direction short term, short term movements tend to coincide time wise.

How useful is this?

This can be used as a proxy indicator, if say it is not clear on one instrument what the next step is, the other instrument might be offering a better clue.
Enjoy!