The US dollar could be undervalued if commodities continue to rip higher

For those that unaware, it is a big week for central banks and therefore markets – with the RBA, BOJ, Fed, BOE and SNB on tap. We’re just hours away from the BOJ potentially exiting negative interest rates for the first time since 2016, and the FOMC are set to release their updated staff forecasts and dot plot. Volatility is certainly expected.

As we await the outcome of the BOJ’s meeting, I want to look at the relationship between commodities and the US dollar ahead of the FOMC meeting, because worrying signs are brewing.

The chart below shows the Thomson Reuters CRB core commodities index and the US dollar index. Whilst far from perfect, they generally share a positive correlation. And that is a concern because it shows commodities ripping higher ahead of the US dollar. Rising commodities are inflationary, and if inflation is set to rise then it means central banks have less wriggle room to cut interest rates.

In the case of the Fed, the December ‘Dot Plot’ signalled three rate cuts this year. Yet with inflation already rising, commodities on a tare and a US election fast approaching, if the Fed are to cut at all they may need to do so sooner than later. And I find it difficult to envisage them cutting soon. And this brings with it the sobering thought that if commodities continue to rise, the Fed may not be in a position to cut rates at all this year. I’m not sure anyone really wants to hear that, but if it turns out to be correct then the US dollar looks quite undervalued.

USD/CHF technical analysis:

If I had to take a long punt on the US dollar, my preference would be USD/CHF. There is a decent chance the SNB will deliver at least a dovish tone later this week (if not a surprise cut) given their undershoot with inflation, and my expectation that the Fed are in no position to be too dovish this week.

The daily chart shows a strong bullish trend structure, and prices close above the 200-day MA and EMA on Monday. The pair seems to be hesitant to break above 0.89 immediately, but the 50-day EMA has provided support and a 3-wave retracement against an impulsive move higher has occurred. From here, bulls could seek to buy dips or wait for a break above 0.8900 to bring 0.9000 into focus, near the high-volume node from the prior trend.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.