Long Term Outlook on USD Index

In the two charts below, is the long term outlook on the USD presented. The USD has seen a remarkable run over a period of about 9 months. That has pushed several currencies of developing economies lower which only added pressure to international commodity trade that has already been suffering for several years. The Good news is that usually after such a run, whatever the instrument it is, what follows is a last swing before the trend reverses.

Below I present my preferred count. The alternative count is not much different, however it would indicate that the top is already in place at 100.390 on March 13th, 2015. However, judging on the price action after that point, I am tending towards having one more swing higher that will push the Dollar Index beyond 100.390 putting further pressure on developing currencies and possibly commodities.

As discussed in the last post, relation between USD Index and commodities is by no means linear, however considering the overall fundamentals and general sentiment of the market, I would view that any news on strengthening USD will push traders to sell commodities. A relation that probably will be best displayed in Oil prices in the near term future!

Before I present the chart, I can only say, hold your seats and brace for impact, who survives will be seeing better days soon. 🙂

USD Index Weekly Count

USDWeekly

USD Index Daily Count

USDDaily

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.