A New Commodity Bull Market Must Come With a Weak US Dollar

Trade finance banks also provide the ability for producers and consumers to hedge their exposures. This is far more important for producers than consumers, as consumers can ultimately pass on any price changes to customers, whereas producers have fixed costs to cover that are mostly in the currency of the country where production occurs.

For the US Dollar, all of these factors can be boiled down to the direction of commodity prices. This relationship is special to the US Dollar, and isn’t shared by any other currency. It is not due to the fact that the US is a large consumer of certain resources as the correlations don’t change when the US is a net exporter of oil, for example

The trends are faster in the case of weak commodity prices because the cycle will exhibit the same links, but in an accelerated manner. Producers, worried about covering their fixed costs, are incentivised to increase supply to try to get volume to overcome the price effect, further pressuring prices downward.

The theory I advance here is that chang

At the quarterly to annual scale however, the factors to price moves become more obvious.

The key factors are:

• GDP growth differentials;

• Interest rate differentials; and

• Capital flows

Why the denomination of commodity pricing matters

The key to understanding the link between commodities and the US Dollar is the fact that most commodity producers have costs that are in their local currency, while all their revenues are in US Dollars, the currency in which most commodities are priced.

When commodities are strong, the US Dollar is weak as producer economies outperform the US. Due to this, they set interest rates higher, and strongly attract capital away from the US.

When commodities are weak, the US Dollar is strong as producer economies underperform. They then set interest rates lower, and lose capital to the US safe haven. US Dollar based borrowing in these countries will sometimes precipitate a crisis at the same time as a strengthening US Dollar makes it harder to repay loans.

The Yuan is intentionally weakened to encourage growth. This will usually come with other growth measures that involve credit expansion, fixed asset investment and thus commodity consumption. The US Dollar, as a free-floating currency, doesn’t have the luxury of being managed against a broader national goal.

Interestingly, it’s the lack of an open c

It is interesting that this run up in commodity prices over this 10 years from is still smaller than what happened between 1971 and 1980 during the period of the Great Inflation. In the ‘70s, commodity prices grew twice as much in roughly half the time. This says something about the supply side response by producers to the most populous nation in