Fate of commodities is linked to dollar

A month or so ago we highlighted a research note from Barclays that showed how investors were continuing to retreat from commodities.

Long-term readers will not be surprised to learn that looks to have marked a turn of fortune for the sector.

The Continuous Commodity Index is an equally weighted measure of 17 commodity futures, including energy, base metal and agricultural benchmarks, along with precious metals, too.

As such, it is a useful gauge of sentiment toward the broad asset class. The CCI hit a five-year low in March but has trundled higher of late, forming what chartists might consider a solid looking base.

The rally in crude oil has evidently helped. Copper has bounced in recent months, too, overcoming the market's concerns about waning demand from China. Many "softs" remain near recent lows, though.

So, does this mean we are at the threshold of another longer term rally for raw materials - particularly industrials?

Possibly not in the short term and the reason is the US dollar - in which most benchmark commodities are denominated.

As the chart show, the CCI's positive run has coincided with the dollar index's (DXY) dip from 12-year highs (we've inverted the DXY to illustrate).

But the buck is already showing signs that its retracement may have run its course. Bank of America Merrill Lynch notes that, since 1971, the DXY's average gain in May is 0.5 per cent, its second best month of the year.

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