Much of the raw commodity sector has been beaten up over the past several weeks, including grains, soft commodities, and crude oil. However, veteran raw commodity market watchers are taking note of two important developments that could turn the tide more in favor of the bulls: a slumping U.S. dollar and falling U.S. Treasury yields.
King Dollar Is Taking a Gut Punch and Is Now on the Ropes
The U.S. Dollar Index ($DXY) on Tuesday hit a 3.5-year low and has been trending lower since mid-January. The USDX is a basket of six major world currencies weighted against the greenback. The index is a good gauge of the overall health of the U.S. economy. Most major global trade is conducted in U.S. dollars. When the greenback is depreciating, that means purchasing dollar-based commodities in non-U.S. currency is a less expensive endeavor — suggesting better demand for those dollar-based commodities, including metals, grains, energy, soft commodities, and livestock.
Importantly, trends in the currency markets tend to be stronger and longer lasting than price trends in other markets. The Dollar Index is in a six-month price downtrend, but that is by no means a mature bear market for currency. I expect a weaker U.S. dollar could be price-bullish for commodity markets for at least another year.
The other element that could help pressure the U.S. Dollar Index is the upcoming BRICS meeting between Brazil, Russia, India, China, and South Africa. These countries are all aiming to undermine the U.S. dollar’s strength and reserve status around the globe. The BRICS summit will take place in Rio de Janeiro on July 6-7. The early July BRICS meeting will be closely monitored by the general marketplace, but especially by currency traders.
U.S. Treasury Yields Are Falling, Giving the Federal Reserve Some Rate-Cut Leeway
The benchmark U.S. Treasury note yield this week has fallen to a two-month low of around 4.2%. Reasons for declining U.S. yields include tamer U.S. inflation reports in recent months, recent U.S. economic data that has not been overly weak but has also not been robust, and better safe-haven demand for U.S. Treasuries amid the recent geopolitical flare-up in the Middle East.
Falling U.S. Treasury yields suggest the Federal Reserve will cut interest rates sooner rather than later. Currently, the market is factoring in at least two interest rate cuts by the Fed this year. The Fed’s own current projections indicate two cuts. However, if Treasury yields continue on a mild downward trajectory in the coming weeks, don’t be surprised to see the market factor in three rate cuts from the Fed. You can bet that Fed Chairman Jerome Powell is also feeling the pressure from President Donald Trump to cut interest rates.
If and when the Fed does cut interest rates, it will likely stimulate consumer demand for goods and services due to lower borrowing costs.
And if the Fed is cutting interest rates, other world central banks would be more likely to do the same, and in turn stimulate better global demand for raw commodities. This scenario would mean a cyclical upturn in raw commodity market prices that would likely last at least a couple years. The scenario also suggests many currently beaten-up raw commodity markets are presently value-buying opportunities.
On the date of publication, Jim Wyckoff did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
