The world’s going soft... (commodities)
October 11th, 2020
⏰ 1 minute read
⏰ 1 minute read
All now rising ...
A second indicator
Last time I wrote about the one economic indicator I look at every day, the US 10 year bond yield, which has fallen below 1% this year, but is now rising again. Another indicator which shows the economic growth outlook is the dollar. While the bond yield is lower in 2020, indicating weak growth, the dollar is doing the opposite.
DXY
The way I look at the dollar is through the DXY index which is based on a basket of currencies. The dollar goes the opposite way to bonds. When growth is weak the dollar strengthens as investors buy dollars for protection. When growth is stronger the dollar weakens. Last week the DXY index fell to 93 from 96 last December.
Commodities
So the dollar is indicating an even better outlook for growth than the rising bond yields. Is there anything else matching this? Yes there is. In the last few months there has been a surge in prices of soft commodities. Wheat, corn & Soybean prices have surged +20% since June & are all up from the end of December. 2019!
Pattern
If we go back to 2000, the pattern of the DXY index & soft commodities matches. Prices were weak at the end of the 1990s then surged to highs in 2008, the dollar & commodity prices stayed high until 2012 then declined to 2016. Since then the dollar has been turning & is weakening now, commodities are responding & rising.
Rising
What’s happening is counter intuitive to some. Economic growth is weak, how can economic sensitive prices rise? First prices are not high they’re low, reflecting the weak growth. But the outlook for growth is improving as the dollar shows. The biggest beneficiaries will be what was weakest before, soft commodities. Here we can invest in this trend through palm oil.
Last time I wrote about the one economic indicator I look at every day, the US 10 year bond yield, which has fallen below 1% this year, but is now rising again. Another indicator which shows the economic growth outlook is the dollar. While the bond yield is lower in 2020, indicating weak growth, the dollar is doing the opposite.
DXY
The way I look at the dollar is through the DXY index which is based on a basket of currencies. The dollar goes the opposite way to bonds. When growth is weak the dollar strengthens as investors buy dollars for protection. When growth is stronger the dollar weakens. Last week the DXY index fell to 93 from 96 last December.
Commodities
So the dollar is indicating an even better outlook for growth than the rising bond yields. Is there anything else matching this? Yes there is. In the last few months there has been a surge in prices of soft commodities. Wheat, corn & Soybean prices have surged +20% since June & are all up from the end of December. 2019!
Pattern
If we go back to 2000, the pattern of the DXY index & soft commodities matches. Prices were weak at the end of the 1990s then surged to highs in 2008, the dollar & commodity prices stayed high until 2012 then declined to 2016. Since then the dollar has been turning & is weakening now, commodities are responding & rising.
Rising
What’s happening is counter intuitive to some. Economic growth is weak, how can economic sensitive prices rise? First prices are not high they’re low, reflecting the weak growth. But the outlook for growth is improving as the dollar shows. The biggest beneficiaries will be what was weakest before, soft commodities. Here we can invest in this trend through palm oil.
