The COVID-19 pandemic has thrown the entire world into a fragile economic situation. Lock downs are weighing heavily on businesses and profits.
Central banks are trying to fight the situation with a huge monetary stimulus. Add to this the basic emotion of greed and fear and we have a magic cocktail. Money is rotating from some asset classes into the others.
Commodities
Thomson Reuters/Jefferies CRB index which is basket of 19 base commodities, has been in a downtrend and underperforming relative to S&P 500. It recently broken above its February 1999 lows and formed a base on daily chart. RSI(14) is in bullish zone and showing a bullish momentum divergence.
Commodities and Bonds
Commodity/Bond ratio went down from July – December 2008. After a pullback, it was in a downtrend. After making a low on April 21, this ratio is trying to reverse, forming a base. RSI(14) is in bullish zone with positive momentum divergence. A breakout and confirmation on weekly close will be indicative of a possibility that commodities may outperform bonds in near future.
Commodities and Stocks
Commodities have been underperforming stocks on a relative basis since 2008. After forming a bullish reversal candle on weekly chart with momentum making a higher low, commodity/Stock ratio is approaching 38.2% retracement of the last swing from March with bullish momentum divergence. Break above this will be bullish for commodities in short term.
Commodities and Currencies
US Dollar
Commodities and US Dollar have an inverse correlation. As commodities are priced in US Dollars, the US Dollar has a strong influence on Commodities. When the dollar strengthens, the commodity prices will move lower. Weak dollar is inflationary and will usually boost commodity prices.
US Dollar index (DXY) pulled back after March 20 high and consolidating in a range, unable to break out above 101. Momentum is rangebound and has broken down from a coil with a bearish bias.
US Dollar Index is a trade weighted basket of 6 currencies. Euro (58% weight) which breaking out from a triangle with bullish momentum is showing strength which indicates further weakness for US Dollar
Australian Dollar (AUDUSD) and Canadian Dollar (CADUSD)
Both are Commodity heavy currencies.
AUDUSD has broken out from a triangle with bullish momentum. When both price and momentum form similar patterns and momentum breaks out along with the price, the resulting move is usually strong. Below 64 the short term turns bearish.
CADUSD which is sensitive to oil prices is trying to break out from an ascending triangle. Energy has 39% weight in the Commodity Index. Break out in Canadian Dollar to the upside will boost commodity index further.
Weight of evidence suggests an upside in commodities with a short term bullish bias.
CRB Index failing to break and sustain above 130, Commodity/Bond ratio failing to move above consolidation, commodity/Stock ration failing to move above 38.2% retracement, US Dollar above 101, AUDSD below 64, CADUSD below 70 will negate this outlook.
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