Take a look at the accompanying chart, a weekly chart for the spot U.S. dollar index (USDX), and the first thing that grabs your attention is how closely the market has followed its 45* Gann fan lines. This is a technical study that I haven't followed closely over the decades, but will occasionally use it to illustrate the strength of pre-determined trendlines.
The USDX posted a clear V-bottom as the previous secondary (intermediate-term) downtrend quickly reversed to an uptrend. The pivot point was the low of 91.01 posted on September 5. This low was actually a test of major (long-term) support on the USDX monthly chart at 91.17, the 38.2% retracement level of the previous uptrend from the low 70.70 (March 2008) through the high of 103.82 (January 2017).
Also note that weekly stochastics (technical momentum study) established a series of bullish crossovers (fast moving blue line crossing above the slower moving red line) below the oversold level of 20%. This is a reasonably reliable, in most markets, signal or confirmation that the trend has changed.
Having easily crossed the initial technical target of 94.03, the 23.6% retracement level of the previous secondary downtrend from 103.82 through the 91.01 low, the USDX now has its sights set on the 38.2% retracement level of 95.90. Beyond that sits the 50% mark of 97.42. However, weekly stochastics have already raced toward the overbought level of 80%, possibly limiting the range of this initial uptrend.
What does this mean for commodities? First and foremost, a stronger U.S. dollar, and its U.S. dollar index (the value of the greenback versus a basket of foreign currencies), means inflation fears are put on hold. Therefore, investment money will be hard-pressed to find a reason to invest in commodity markets devoid of tight supply and demand situations. Looking across the commodity landscape, there are only a few markets (e.g. cotton, cocoa, Brent crude, maybe oats) where bullish fundamentals are indicated by futures spreads.
I've been asked a number of times recently if we will see some of the money being made in the stock market roll back into commodities. My answer is as it has been for quite some time, probably not. Not with the U.S. dollar and USDX gaining bullish momentum. Not with most commodity market forward curves showing bearish supply and demand. What could happen though is the bullish turn in the USDX could lead investment traders to build reduce some of their net-long holdings or increase the size of their net-short futures positions in certain commodity markets.
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