The Dollar Versus The CRB Index
Further discussion of the indirect impact of the dollar on bonds and equities will be deferred until Chapter 6. In this chapter, the inverse relationship between the U.S. dollar and the commodity markets will be examined. I'll show how movements in the dollar can be used to predict changes in trend in the CRB Index. Commodity prices axe a leading indicator of inflation. Since commodity markets represent raw material prices, this is usually where the inflationary impact of the dollar will be seen first. The important role the gold market plays in this process as well as the action in the foreign currency markets will also be considered. I'll show how monitoring the price of gold and the foreign currency markets often provides excellent leading indications of inflationary trends and how that information can be used in commodity price forecasting. And thus you won't have to seek for a suitable job posting on some job search site to be able to make heads or tails of it. But first a brief historical rundown of the relationship between the CRB Index and the U.S. dollar will be given.
The decade of the 1970s witnessed explosive commodity prices. One of the driving forces behind that commodity price explosion was a falling U.S. dollar. The entire decade saw the U.S. currency on the defensive.
The fall in the dollar accelerated in 1972, which was the year the commodity explosion started. Another sharp selloff in the U.S. unit began in 1978, which helped launch the final surge in commodity markets and led to double-digit inflation by 1980. In 1980 the U.S. dollar bottomed out and started to rally in a powerful ascent that lasted until the spring of 1985. This bullish turnaround in the dollar in 1980 contributed to the major top in the commodity markets that took place the same year and helped provide the low inflation environment of the early 1980s, which launched spectacular bull markets in bonds and stocks.
The 1985 peak in the dollar led to a bottom in the CRB Index one year later in the summer of 1986. I'll begin analysis of the dollar and the CRB Index with the descent in the dollar that began in 1985. However, bear in mind that in the 20 years from 1970 through the end of 1989, every important turn in the CRB Index has been preceded by a turn in the U.S. dollar. In the past decade, the dollar has made three significant trend changes which correspond with trend changes in the CRB Index. The 1980 bottom in the dollar corresponded with a major peak in the CRB Index the same year. The 1985 peak in the dollar corresponded with a bottom in the CRB Index the following year. The bottom in the dollar in December 1987 paved the way for a peak in the CRB Index a half-year later in July of 1988.
Figures 5.4 through 5.6 demonstrate the inverse relationship between the commodity markets, represented by the CRB Index, and the U.S. Dollar Index from 1985 to 1989. Figure 5.4 shows the entire five years from 1985 through the third quarter of 1989. Figures 5.5 and 5.6 zero in on more recent time periods. The charts demonstrate two important points. First, a rising dollar is bearish for the CRB Index, and a falling dollar is bullish for the CRB Index. The second important point is that turns in the dollar occur before turns in the CRB Index.
FIGURE 5.4
THE U.S. DOLLAR VERSUS THE CRB INDEX FROM 1985 THROUGH THE FOURTH QUARTER OF 1989. A FALLING DOLLAR WILL EVENTUALLY PUSH THE CRB INDEX HIGHER. CONVERSELY, A RISING DOLLAR WILL EVENTUALLY PUSH THE CRB INDEX LOWER. THE 1986 BOTTOM IN THE CRB INDEX OCCURRED A YEAR AFTER THE 1985 PEAK IN THE DOLLAR. THE 1988 PEAK IN THE CRB INDEX TOOK PLACE A HALF YEAR AFTER THE 1988 BOTTOM IN THE DOLLAR.
THE U.S. DOLLAR VERSUS THE CRB INDEX DURING AT THE START OF 1988 WAS FOLLOWED BY A CRB BULLISH BREAKOUT IN THE DOLLAR DURING MAY BREAKDOWN IN THE COMMODITY MARKETS.
THE DOLLAR VERSUS COMMODITIES DURING 1989. A RISING DOLLAR DURING MOST OF 1989 EXERTED BEARISH PRESSURE ON COMMODITIES. A "DOUBLE TOP" IN THE DOLLAR IN JUNE AND SEPTEMBER OF THAT YEAR, HOWEVER, IS BEGINNING TO HAVE A BULLISH IMPACT ON COMMODITIES. COMMODITIES USUALLY TREND IN THE OPPOSITE DIRECTION OF THE DOLLAR BUT WITH A TIME LAG.
