The correlation between commodities and the US Dollar

The correlation between commodities and the dollar has not always been evident but the financialization of the commodity markets over the past 15 years has strengthened it . Fiscal and monetary s timulus has tended to deepen this correlation. Si nce the latest round of stimulus packages in response to the C ovid -19 crisis, the negative correlation between the DXY and commodities has returned. The 90-day rolling correlation between both has dropped to around -0.5. Nevertheless, attributing the rally in commodity prices solely to a weaker USD misses the whole picture. The relationship must be viewed in the context of broad supply and demand fundamentals . Chinese demand for commodities is a key driver, given China’s large percentage of global demand for several commodities. As we emerge from the economic crisis created by Covid-19, our FX strategists expect the dollar to weaken, with potential depreciation of up to 20%. We broadly expect the next two year s to be positive for commodity prices, with infrastructure intensive policy in both the US and China marking the beginning of a cyclical upswing , especially for industrial metals. La ck of investment in short-cycle oil supply is also seen adding upwards pressure to oil prices. Should the DXY fall markedly over the next two years, we expect commodities prices to benefit, but amidst a broadly positive fundamental backdrop. This report is a section of a wider report: Dollar: less bang for your buck