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.
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.