The Domino Effect: Euro to Follow Commodities to the Downside? (UUP, USO,... |
Traders and investment heads are constantly looking for signals and divergences in the marketplace to set up their next move. Such an indicator may be currently emerging in the currency market.
Commodities and the US dollar have been trading in lockstep for the past six months. The formula has been rather simple – weak dollar = higher commodity prices. It has been the obvious algorithmic trade of choice.
That relationship has unraveled the past few trading days, as the market has seen a selloff in commodities, while the dollar has been relatively neutral.
Since Monday:
Silver futures have lost 18.6%, dropping from $48.09 to the current price of $39.22. The related silver ETF, iShares Silver Trust (NYSE: SLV) has dropped 17.2%, falling from $46.23 to the current price of $38.27.
NYMEX Crude futures have lost 5%, dropping from $114.82 (52-week high) to the current price of $108.85. The related oil ETF, United States Oil Fund (NYSE: USO) has dropped five percent, falling from $45.60 (52-week high) to the current price of $43.26.
Gold Futures have lost 3.8%, dropping from $1577.4 (52-week high) to the current price of 1517.80. The related gold ETF, SPDR Gold Trust (NYSE: GLD) also dropped 3.8%, falling from $153.61(52-week high) to the current price of $147.73.
Given these declines, and the recent relationship between the dollar and major commodities, one would expect the US dollar to have advanced during the same period. That has not been the case, however, as the dollar has remained neutral versus the euro over the past three trading days.
Each session, the dollar has initially weakened, and each day, it has pared its losses, ending up virtually where it began. For example, the Powershares DB USD Index Bullish (NYSE: UUP), which tracks the dollar against major foreign currencies, closed on Monday at $20.97. Today, it closed at $29.96.
The inability to push the dollar lower is having an obvious affect on the price of commodities, as traders are taking some risk off of the table in anticipation of a possible strong move to the upside by the dollar.
Investment managers and traders are constantly assessing risk versus reward when evaluating a trade. With the dollar sitting near 52-week lows, the most risk appears to be on the short side of the US dollar, while the most reward seems to be on the bullish side.
After all, the US dollar has only been this weak versus the Euro on three other occasions in the past twenty years; briefly in 1992, for most of 2008, and briefly in late 2009. Each time, the dollar quickly strengthened as the euro got sold off to “normal” levels.
The recent selloff in commodities may serve as the “canary in the coal mine” for the euro, as the US dollar looks set to run.
About the author: Benzinga
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