|09-21-2014, 07:42 PM||#1|
Why the inverse relation between commodities and dollar has strengthened?!
Amid the current rise in the U.S. dollar versus major currencies, commodities continued to face a downside pressure, bringing in mind the inverse relation between them. While sometimes the inverse relation is not strong enough, meanwhile it seems that the opposite direction is pretty clear. But what are the main reasons behind the recent strength in the relation?
Divergence in monetary policy between Fed and other central banks
Perhaps the key driver to the U.S. dollar’s strength is the divergence between the Fed’s outlook and other major central banks. Although the Fed’s policy meeting this month showed a renewed pledge to hold interest rates for a “considerable time,” policymakers raised interest rate outlook to reach 1.375 percent by the end of next year, compared with previous forecasts of 1.125 percent. As for 2016, policymakers foresee a move up to 2.875 percent from June’ prediction of 2.50 percent.
As well, the number of Fed members predicting an interest rate hike next year edged up to 14 out of the 17 members, from 12 three months ago.
Hence, the Fed seems to be the closest among central banks to raise interest rates, as the ECB has announced a new ABS program after slashing interest rates twice since June. The BOE has mentioned it will not raise interest rates before spring 2015, where the majority of MPC members are in favor of leaving interest rate low for a while to avoid risks stemming from the euro area and global geopolitical tensions.
In Asia, the Bank of Japan is keeping stimulus and thinking of negative interest rates, while the People Bank of China may inject 500 billion yuan to bolster growth.
The aforesaid factors make the dollar the most favorite and safest choice to investors amid uncertainties about global outlook.
Oversupply and weak demand
As for oil, the oversupply in markets is a key factor keeping pressure on oil prices, pushing it down to near a two-year low in September.
The resumption of oil production from Libya’s Sharara oilfield in mid-July has provided 340,000 barrels per day, as Libya, which holds the biggest oil reserves in Africa, attempts to come back strongly in market. Also, the glut of high-quality, light oil in the North Sea crude has resulted in big discounts below futures.
In response, Saudi Arabia, OPEC’s biggest oil producer, said it slashed its production by nearly 400,000 barrels a day in August, but other leading member’s preferred to raised their output.
On the demand side, the worries about global economy outlook has lowered demand on commodities, especially oil which is mainly used as an input in production process. The OECD cut its growth forecasts for major developed economies this month, where it slashed growth forecasts for the world’s oil biggest consumer to 2.1 this year from its previous estimates of 2.6 percent.
Moving to gold, the problem is mainly coming from the demand side due to the weakness in physical demand from China and India, the metal’s biggest buyers.
China Gold Association said the country’s purchases of the previous metal plunged during the January to June period as the low inflation and high profits in the stock markets sapped demand on the yellow metal as an alternative investment.
All in all, the improving U.S. economy outlook a well as the Fed’s tendency to tighten monetary policy plus supply and demand factors have eroded demand on all dollar-priced commodities are the key reasons behind the strength in the inverse relation between dollar and commodities.
The following chart shows that while oil and gold are declining the dollar index, which tracks the dollar’s movement versus a basket of major currencies, is rising.
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