The US dollar has been sliding over the past year, something that Macquarie Bank thinks will continue.
It sees a bear market on the horizon for the US dollar index, or DXY, defined as a drop of 20% or more from its previous cyclical peak.
Such an outcome — should it come to fruition — will have ramifications for asset prices around the globe, including for commodities which are usually priced in US dollar terms.
As seen in the table below from Macquarie Bank, during period when the DXY has weakened in the past, its usually helped to support commodity prices.
During the current bout of US dollar weakness, seeing the DXY suffer a technical correction of more than 10% from the levels it was trading at in early 2017, all commodities except for tin prices have pushed higher during this period.
So will this trend continue should the DXY weaken further?
Macquarie thinks it will, albeit with a few disclaimers.
“Our analysis suggests most commodity prices in dollars will gain,” the bank says.
“There have been dollar bear markets when many commodities have fallen in price — such as between June 1989 and January 1991 — but the most likely scenario for this — a sharp slowdown in US growth — is very far from our base case.
“We expect US growth to accelerate and have an optimistic view of global economic growth.”
While, from a broader perspective, Macquarie expects commodities to perform well should the dollar weaken further, it says that “not all commodities will rise”, adding that “an expected slowdown in China and rising real rates will have negative implications for certain commodities that could negate the weaker US currency”.