US Dollars and Commodities

We've seen a nice little rally in US Dollars over the last couple of weeks. This is something we expected to occur as the Euro set up beautifully for a false breakout. I love it when that happens. It's tough to find a better risk/reward trade in any market. But today, let's take a look at the implications of this renewed strength in US Dollars.

Like we always talk about, the negative correlation between US Dollars and the CRB Index is one of the most reliable correlations out there. So if this Dollar continues to strengthen, I would expect more weakness out of the commodities market. Here is a chart of the US Dollar Index compared to the performance of the CRB Index, which consists of 19 traded commodities:

Notice the recent decline in the CRB as the Dollar breaks out of this four-month downtrend. As mentioned before, this is one of the most reliable negative correlations across the intermarkets. I have to believe that it's due to the simple reason that these commodities are all priced in US Dollars (i.e. Oil = $94/Barrel).

So here is the US Dollar Index breaking out of its downtrend. With the Euro weak coming off that key February resistance, it looks to me like the Dollar still has more upside. That shouldn't be too positive for commodities going forward:

How will this affect the stock market? Will it?

Tags: $SPY $CRB $USD $DX_F $CL_F $UUP $EURUSD $FXE