Login Open account
Singapore
WCU: Commodities await the greenback’s fate WCU: Commodities await the greenback’s fate WCU: Commodities await the greenback’s fate

WCU: Commodities await the greenback’s fate

Commodities
Ole Hansen

Head of Commodity Strategy

Most major commodities were headed for weekly gains as the short-term focus on growth and demand risks related to emerging markets faded. This was helped by the dollar, which was heading for a second weekly loss. Overall, commodities have had a very bumpy ride this month that at one stage saw the Bloomberg Commodity Index hit a one-year low before recovering. 

With so much of the direction still depending on the direction of the dollar and US interest rates, the focus this week is firmly on the annual gathering of central bankers from around the world at Jackson Hole, Wyoming. On Friday, Federal Reserve chair Jerome Powell made his symposium debut at a discussion about the economy and monetary policy. During the week, the minutes from the August 1 Federal Open Market Committee meeting were released and they suggested that the Fed will continue its tightening agenda until the US economy shows slowing tendencies or the market forces the Fed to rethink. On that basis, another two rate hikes this year are expected with the next coming at the September 26 meeting.

Having been attacked by President Trump for hiking rates (and thereby supporting the dollar) and given the latest EM turmoil and the ongoing trade war, the market was looking for any signs of Powell softening his stance, something that could have an impact on both the dollar and several commodities taking their cues from the strength of the greenback. In it, however, he made no deviation from current market expectations of future rate hikes but the dollar nevertheless traded weaker thereby supporting commodities. 
Bloomberg Commodity Index
Source: Bloomberg, Saxo Bank
From an EM growth and demand perspective, the narrative is arguably that global markets will remain in a fragile state until the Fed backs off its quantitative tightening and rate hiking regime, with the risk of a real crisis linked to EMs' overindulgence in borrowing USD since the global financial crisis. 

Not all commodities received a boost from the weaker dollar. In the grain sector covering the key crops of wheat, corn and soybeans, the market has turned its attention to the US harvest Following a troubled growing season in Europe, CIS and Australia, with the US expected to yield ample supply to offset losses elsewhere. Adding to this, the ongoing trade dispute with China has sharply reduced demand from the most important destination for US-produced soybeans. 

Overall, the Bloomberg Commodity Index covering 25 major commodities traded higher for the first time in three weeks with the aforementioned losses being more than offset by gains in crude oil and products as well as industrial metals. After a few weeks of heavy selling, industrial metals (led by zinc and aluminium) reacted positively to signs of emerging demand from China. Precious metals traded higher but have yet to break any significant levels that may trigger a rethink among speculative traders who currently hold a record short position three times the size of the previous record set in December 2015. 

Crude oil recovered more than half of the July-August sell-off. This came as the market’s attention turned from the potential longer-term impact of lower EM growth to the short-term impact of US sanctions against Iran. 

Tanker tracking data from Platts show that Iran’s crude oil exports have fallen sharply during the first half of August. During this time they saw 1.68 million barrels/day being exported, some 640,000 b/d below the average for July. This will undoubtedly raise pressure on the remaining Opec members and also raise the question whether they will be able to meet the potential shortfall – not only from Iran but also from Venezuela which continues to deteriorate. 

Hedge funds have continued to reduce bullish oil bets in recent weeks and since hitting a record above one million lots (one billion barrels) on March 30, the combined long in WTI and Brent has now seen a 37% reduction. Given its role as the global benchmark, Brent crude oil has seen the biggest reduction to 336,000 lots, down 47% since March.  

During the July to August sell-off it is worth noting that both long and surprisingly also short positions were reduced. The gross-short in WTI and Brent remains close to the lowest in five-years and this highlights the limited selling appetite ahead of the expected Iranian supply drop. 

We maintain the view that Brent crude oil is likely to remain range-bound within a $70 to $80/barrel range. With the short-term focus switching to supply we see some additional upside potential towards $80/b. 
Brent crude
Source: Saxo Bank

Gold traded higher for the first week in seven as the dollar weakened and after President Trump said that he was “not thrilled” with the Fed continuing to raise rates. 

Under the chairmanship of Trump appointee Jerome Powell, the US Fed Funds rate has been raised three times on top of the two hikes during the earlier part of Trump's presidency.

The market responded by sending the dollar lower with the euro breaking back above €1.15 and thereby returning to a potential €1.15 to €1.17 range. This helped remove some of the euro weakness that emerged the previous week in response to Italian budget risks and EU banks’ exposure to EM debt, and most notably Turkish debt.

For the dollar and short term rates, it’s not a question of what President Trump says but more what the U.S. Fed does. While gold may show continued signs of stabilising, a rally very much depends on whether funds holding a record short begin to take cover. For that to happen, gold needs at a minimum to break above a band of resistance between $1,200 and $1,210/oz.

XAUUSD
Source: Saxo Bank
The combination of ample supply, a speculative attack, and a Brazilian real in freefall at one point helped drive the price of Arabica coffee below $1/lb for the first time in 12 years. For the same reasons, sugar dropped below 10 cents/lb for the first time in 10 years. Using the Bloomberg Commodity coffee index, which includes the roll yield, we find Arabica coffee down by 24% year-to-date and since the 2014 peak it has lost close to 70% of its value.

Ample supply from Brazil, the world’s biggest producer of high-quality beans, together with a significant recent 10% drop in the value of the Brazilian real on the election and general EM nervousness has done most of the damage to price. Additional to this, we have speculative selling from hedge funds which has further suppressed the price. Currently funds hold a record short position of a staggering 1.7 million tons or 28% of the expected global production for 2018-19. As long the technical or fundamental outlook does not improve, they are unlikely to buy back their short positions and thereby support the price. 

Fundamental support, however may start to emerge from reports that have begun to highlight some drought risk to the next crop in Brazil. An unusually early Brazilian coffee flowering has raised some concerns as this phase requires water to support the process towards developing cherries. The dry season normally extends until the second half of September so the next few weeks could be quite crucial. 
Arabica Coffee
Is Arabica coffee ripe for a bounce after hitting a 12-year low? (source: Saxo Bank)

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 05

Macro: It’s all about elections and keeping status quo

Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

Read article

FX: The rate cut race shifts into high gear

As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

Read article

Equities: The AI and obesity rally is defying gravity

Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

Read article

Fixed income: Keep calm, seize the moment

With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

Read article

Commodities: Is the correction over?

Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

Read article

  • Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article

  • FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article

  • Equities: The AI and obesity rally is defying gravity

    Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

    Read article

  • Fixed income: Keep calm, seize the moment

    With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

    Read article

  • Commodities: Is the correction over?

    Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

    Read article

Disclaimer

 The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore
Products & pricing
Asset Management
Platforms
Accounts & service
General
Other
Legal

Losses can exceed deposits on margin products. Please ensure you understand the risks.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.