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Why the USD Matters for Commodity Markets

  • USD’s correlation with commodity prices has turned sharply negative with the broad “financialization” of commodities during the first decade of this century, following the credit crisis, global financial crisis, and then record-financial easing. Since 2013, the correlation turned less negative overall with occasional positive spikes, but stayed mostly negative. The 6-month rolling correlation between the Bloomberg Commodity Index and USD Index reached the record positive levels in the early stage of the COVID-19 market shock, before quickly reverting to negative territory as commodities joined the broad recovery rally in global risk assets while the USD weakened on quantitative easing and lower interest rates.


  • Key economic linkages between commodity prices and USD have evolved in recent years with changes in commodity trade flows and the macro environment. The denomination effect remains intact with global commodity benchmarks still mostly priced in dollars, in addition to the USD hedging effect whereby large institutional investors (e.g. sovereign funds and central banks) diversify portfolios away from US Treasuries into other assets such as commodities. However, some traditional factors such as the current account and petro-dollar recycling have weakened significantly.




  • The commodities-USD inverse relationship could stay strong in the short term, but Citi analysts expect it to revert to long-term levels in place since 2013 over the medium term. This means it could stay negative on average, while turning less negative. Overall, Citi analysts are bearish the USD, and this could be positive for commodities, particularly precious metals and industrial commodities with high beta to currencies. Gold’s relationship with the USD is unique given its historic attributes as a currency – it has historically had an inverse relationship with the USD, driven by strong denomination effect, gold’s role as an inflation hedge, and changes in interest rates. While the negative correlation did weaken this year as QE and a strong risk-on/risk-off effect came into play, Citi analysts expect gold prices to average US$1,825/t in 2020 and US$2,275/t in 2021.

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