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

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.

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

The timing of the bottom of the US Dollar may not be important when considering the long-term view. However, the absolute high in the US Dollar could be set at the time of the peak of the current Fed hiking episode, which will not be when the last interest rate hike is completed, but when US economic growth starts to turn downwards.

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.

You might be wondering why this period is the weakest for illustrating the link between commodities and the US Dollar. In this cycle the GSCI index is affected by its construction by having a lower weight in oil, the key seaborne commodity at the time. This has an impact because the ‘80s was a rare period in which energy and non-energy commodities

The invasion of Ukraine by Russian forces in February 2022 has abruptly ended a prolonged (and rare) period of peace in Europe.

This period of peace has made us forget about the realities of our need of resources for modern society. Tech, and all the evangelism associated with it, does not solve the need for base commodities. In fact, it drives it.

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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

Whether you credit Paul Volcker for breaking inflation through aggressive monetary policy tightening, or a fall in oil prices due to abundant supply in the early ‘80s, by 1980 the 10-year run in commodities was over, as so was the weakness in the US Dollar.

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