U.S. Dollar Index:
Aside from ag contracts specifically, few markets get looked at by commodity traders more than the U.S. Dollar Index. The performance over the last few weeks has been encouraging for bulls as the global reserve currency has fallen to fresh lows for the move and is trading at the lowest levels since July 9, 2018. With overnight trade, the dollar has also pushed through the 61.8% retracement of the entire 88.2530 to 102.9920 rally from the 2018 lows to the 2020 highs. In our technical opinion, there is no meaningful support between spot prices and the 2018 lows. If the U.S. Dollar Index were to continue falling to those 2018 lows, it would be broadly supportive to commodities generally and ag markets specifically. As the dollar falls, commodities priced in dollars become cheaper for overseas buyers, stoking exports. From a wave count perspective, it looks as though the dollar is seeing the fifth and final wave unfold as part of a larger five-wave Elliot sequence.
Bloomberg Commodity Index:
Aside from the U.S. Dollar Index, the Bloomberg Commodity Index (BCI) is another important basket we follow to help gauge the overall strength or weakness of the commodity sector. It would stand to reason that as the dollar has gotten weaker, the value of commodities would get stronger. That has been true in this case with the BCI trading at the highest level since March. The strength in the BCI has been much less than the weakness in the dollar, however, with the BCI having recovered roughly 38.2% of the entire December-March sell-off. Propelling much of the strength inside the BCI has been the rally to multi-year highs in precious metals and the recovery in energy markets as crude oil climbed back over $40 per barrel (bbl). The tail does not wag the dog in this case, so for the BCI to continue higher, individual commodities will have to continue producing strength. If weakness persists in the U.S. Dollar Index, the biggest benefactors should be precious metals as a hedge against inflation as well as agriculture commodities as import demand rises for the relatively cheaper good.
One of the more exciting commodities of late has been gold, which made fresh record highs in overnight trade, taking out the 2011 highs at $1,923.70. Inflation bulls have been touting the reasons behind owning gold and silver since 2008, but it would appear those reasons appear sound at current. If we look at a monthly active continuation chart going back all the way to 1974, a rather interesting chart emerges. From a wave perspective, one could make the very real argument the thrust to new highs is the fifth and final wave of a larger degree five-wave sequence with wave one occurring in January 1980 while wave three concluded in 2011. If one measures the length of waves one and three and applies them to the end of wave four at $1,045.40, some possible targets come into focus. The 61.8% progression of wave three from the $1,045.40 lows would be $2,078.80 and would seem like a logical target after the breakout. If wave three is going to be replicated in its entirety, the wave five target would end up at $2,714.30. Where gold will end up is unknowable at this juncture but should simply be pointed out there is no resistance above this market any longer as new highs are being made, so the continuation or acceleration of the rally should not surprise.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grains and grain futures involve substantial risk and are not suitable for everyone.
Tregg Cronin can be reached at firstname.lastname@example.org
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