Thursday, July 24, 2008

Correlation Between Oil, Commodities & USD




hei Dali You conclude that dollar will be weakening. But oil is dropping, resulting in dollar strengthening. How you justify your analysis?

Comments: My thesis on dollar weakening has nothing to do with oil. For too long oil has been rising on the back of a weaker USD as most commodities are priced in USD. This is the speculators mantra, that commodities deserve to go higher because dollar is weakening as they are priced in USD. That has only some truth in that statement, which has been overplayed for what its worth to the benfit of speculators in commodities. Naturally as the oil is starting to fall along with other commodities, the reverse correlation will hold for a while.


My reckoning on a weaker USD going forward has a lot to do with the bailouts necessary to be undertaken by the Treasury and The Fed (read below). Do not be blinkered by knee jerk reactions - such as this, and the recent sell down in CPO (which has quite different fundamentals to oil). The USD will resume its downtrend once the heat goes off commodities and people start to refocus on the credit bailouts and the strong likelihood of lower interest rates going forward by the Fed.

p/s photos: Aum Patcharapa Chaichua

4 comments:

Encik Wan said...

Thank God, another opportunity to go long on commodities! Why bullish on commodities despite threat of lower demand? Faster increase in money supply due to various bailouts. It is Economics 101 : demand and supply. If Fed and Treasury can contain fallout from subprime crisis, not to forget trillions of credit default derivatives. Good luck everyone.

see said...

Lower US interest rates...do you think that will curb China's ability to raise its interest rate to reign in inflation? If US economy in trouble & China is weak with inflation, then we all in trouble, so much for help in the form of decoupling

lsb said...

History shows that when the U S economy tank, the USD firms.

China understood that its power lies in its new middle class of around couple of 100 millions, with its reserves the leaders is not going to let this class be destroyed.

Hunter said...

Just wait till the leverage loans start defaulting. Due to the low interest rate environment companies have been paying down their multi-million(in the case of the US auto makers and casinos Billions $$) dollar loans with even bigger loans. There are many investors expecting defaults coming soon as can be seen by the LCDX closing below 80 for the first time. I'm wondering if there are any banks or insurance companies out there net long LCDS/LCDX. It's totally conceivable since bank loans were once viewed as the most stable of all fixed income instruments.