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Martin Tillier

Martin Tillier

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Ride The Rally But Practice Caution

If the last few weeks in the commodity markets have proved one thing it is that the strongest fundamental influence on pricing in those markets is the relative strength of the dollar. The inverse nature of that relationship is ably demonstrated by three simple six month charts, for the dollar index, gold, and oil.

(Click to enlarge)

Figure 1: Dollar index 6 Month chart



As you can see the dollar spent the last quarter of last year rising, while both gold and oil fell. By February, however, as the dollar topped out and turned, both gold and oil began to recover. Those moves in the dollar were largely in response to market expectations regarding the Fed’s actions.

Late last year it became clear that the Fed wished to “normalize” interest rates by returning to a gradual program of rate increases as soon as they thought the market could bear it. Given the fact that Japan and the ECB, along with several others were still trying to combat sluggish growth by racing to the bottom in currency terms that led to dollar strength.

By the end of January, however, as the U.S. and global stock markets fell dramatically, the Fed began to show signs of wobbling. Conventional wisdom shifted and there was a growing belief that they would not follow through with the program and may not raise rates this month as had previously been assumed. When the Fed’s (in)decision was announced on Wednesday it became clear that…

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