By Ole Hansen Head of Commodity Strategy / Saxo Bank
Three consecutive weeks of commodity gains gave way to losses this past week. The US dollar, which had been retreating since April, recovered and the impact was felt across most commodity sectors. While individual pieces of news relating to the different sectors are important, the overall direction of the market - as the chart below shows - continues to come from the dollar.
This obviously raises the question where the greenback goes from here, and we are keeping a close eye on two levels in order to determine that.
Support at 1.1050 in EURUSD and resistance at 122 in USDJPY are the two key levels which need to be broken in order for the dollar to resume the rally which began almost one year ago. Failure to do so should continue to support commodities in the near-term.
All sectors suffered losses, not least industrial metals where nickel dropped by more than 8% while copper broke lower following a period of consolidation. The agriculture sector was also lower during a week where talk of the potentially devastating return of "El Nino" continued to attract attention.
The energy sector maintained its recent strength after a selloff related to the stronger dollar partly reversed on news that US inventories and production continue to slow as the US gears up for the biggest opening of the driving season in a decade.
Middle East tensions also added some support, thereby more than offsetting news that major Opec members such as Saudi Arabia and Iraq both continue to increase production while a return of Iranian oil cannot be ruled out.
Precious metals suffered a greenback-related setback but quickly stabilised, helped by gold which managed to find support at $1200/oz (which is the middle of the range that has now prevailed for the past couple of months).
Gold and the other precious metals are desperately looking for a driver or an event to give the sector a new lease on life. Looking at gold, we have seen several failed attempts in both directions over the last couple of months as uncertainty with regards to the timing of the first interest rate hike in the US, the movements of the dollar and gyrations in bond markets have all left gold going nowhere.