Commodity Price Trends: Monitor Euro/USD

The euro/dollar rate has moved closely with commodities since mid-2011. It is hard to separate correlation from causation, but it is likely that the dollar will heavily influence near-term commodity trends, especially if the key 1.30 euro level gives way.

Commodity Price Trends | Monitor Euro/USD

T echnically, the euro is hanging by a thread above the 1.30 euro level at a time when futures market speculators are net short the currency. Fundamentally, the EMU zone could use a cheaper currency, even if Germany (which accounts for 27% of EMU GDP) is starting to worry about overheating.

The issue is whether currency moves are sufficient to sustain commodity weakness beyond the near-term.  We do not think so. Weakness should give way to a choppy, selective uptrend on the back of “nothing going wrong” on either growth or liquidity fronts.

Crude oil should outperform in this environment.

Indeed, crude oil is one commodity where near-term and cyclical outlooks are diverging. Brent and WTI prices are 10 and 6 dollars, respectively, below this year’s highs. Even the IEA, which represents oil consumers, is feeling better about the near-term supply/demand backdrop. Speculators holding long positions may capitulate if the euro drops below 1.30.

Looking beyond the near-term, however, our main concern is that global oil prices rise faster than our moderately-bullish forecast. OPEC can credibly defend its $100 basket floor but it is less clear if it can contain prices to the upside.

The bottom line is that oil prices could head somewhat lower in the near-term if the euro falls further, but on a cyclical basis, the risk is that oil prices rise too far, too fast.

Stay tuned.

Print Friendly
Macroeconomic Research
BCA Research About BCA Research

BCA Research is the world’s leading provider of independent investment research. Since 1949, the firm has supported its clients in making better investment decisions through the delivery of leading-edge economic analysis and comprehensive investment strategy research. With access to over 150,000 raw time-series, BCA strategists are aided by one of the most extensive research databases in existence, cover every region of the globe, and provide analysis on virtually every investable asset class. BCA maintains a head office in Montreal, with local offices in New York, Los Angeles, London, Hong Kong, Sydney, and Buenos Aires. Not yet a client of BCA? Take a short trial to our research.