Metal Prices in Hands of FX Markets

In the absence of meaningful change in global growth momentum, the principal impetus for commodity prices is coming from currency movements. The chart shows the U.S. dollar index since 2010. The dramatic upward movement which commenced in mid 2014 coincides exactly with a down leg in U.S. dollar denominated commodity prices. The exchange rate decline dating from early 2016 coincides with what some are now erroneously calling a recovery in commodity markets. The recent change in exchange rate direction coincides with a reappraisal of the extent to which U.S. interest rates are likely to rise in 2016. The exchange rate action has taken us back to levels previously reached several times in the past two years after which, on each occasion, the move has been reversed. From a resource sector standpoint, the foreign exchange market can now be described as precariously poised. The next movement will probably be the result of a complex set of interactions among national monetary policies which currently favour an upward movement in the U.S. dollar leaving the prospect of higher commodity prices on shaky ground.