Most physical commodities are priced in dollars. The grains , metals, both precious and industrial, softs (sugar, cocoa, coffee, etc,.) and energy complex, are all quoted in USD. Should come as no surprise, that severe weakness or strength in dollar should be reflected to some degree in prices of those goods. And that is without taking supply and demand under consideration.
We are going to use CRB Index as a proxy for commodities. We are using Continues CRB Index, rather than CRB Futures values, because there is more look back data available. On the dollar side, US Dollar Index is used, instead of any single currency pair. Data for both is easily available from numerous sources.
After years of steady decline, US Dollar Index has recently made a new low just under 71.00. Over last few weeks we have seen a modest rally which took the Index to about 74.00. This is most impressive run up in over a year, and, more interestingly, weekly chart appears to be building a high probability reversal pattern. Next step is to see this run go above 78.00, confirming trend reversal.
Continues CRB Index has been on an upward run for a few years now. Lately rally has been gathering speed, reaching 580.00, on largest monthly and weekly price moves ever. This chart is a prime example of a parabolic price development, which is unsustainable for much longer, if not over already. This index may likely be in an early stages of major topping pattern.
It must be noted, that both of these indexes are not strictly speaking sums of their respective parts. All components are weighted according to importance assigned to them by index creators. For example, within CRB Index, energy complex is the most influential, while Crude Oil is the largest single component. This is important at current time, because energy complex is still at highest ever prices, while most other commodities have seen substantial sell offs over last few weeks. That includes grains and precious metals. The Index is showing signs of weakness even though its largest component remains at an all time high.
Analyzing CRB Index is not likely to be of much use for a very short term Forex trader. However, if one is looking for a longer term directional confirmation, this index can be a very useful tool. As of this writing, early May 2008, CRB Index, in conjunction with US Dollar Index, indicates happier times for USD.
Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on www.spectrumforex.com . Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at kulej@spectrumforex.com.