Some Commodities Show Strength As Dollar Surges

Conventional wisdom dictates that as the U.S. dollar rises, commodities do the opposite. Over the past year, conventional wisdom has held true; the PowerShares DB US Dollar Index Bullish UUP has climbed 10.7 percent, while the GREENHAVEN Continuous Commodity Indx Fnd GCC has plunged 23.7 percent.

Commodities And The Greenback

However, there are some data points that suggest some commodities experience periods of strength even as the greenback experiences the same. Sugar is a prime example. In the world of exchange-traded products, the Teucrium Sugar Fund CANE and the iPath Bloomberg Sugar Subindex Total Return Sm Index SGG are higher by 6.8 percent and 9.6 percent, respectively, over the past month.

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UUP, the aforementioned dollar ETF, is up 2.7 percent over the same period.

“However, there are other commodities that just aren’t so badly impacted. Feeder cattle and sugar have up market capture ratios of 130 and 125, using the dollar as the market, that says those commodities outperformed the dollar by 30 percent and 25 percent, respectively, in the past 10 years.

“Further, gold, live cattle, zinc, lean hogs and coffee have all posted positive returns on average when the dollar was up,” said S&P Dow Jones Indices Global Head of Commodities Jodie Gunzberg in a recent note.

To this point, gold, as measured by the SPDR Gold Trust (ETF) GLD has not enjoyed dollar strength. GLD, the world's largest exchange-traded fund backed by physical holdings of gold, is down more than 11 percent over the past year and more than 8 percent in just the past month. Although the iPath Bloomberg Coffee Subindex Total Return SM Index JO has been bludgeoned over the past year, the coffee ETN has traded modestly higher over the past month.

The iPath Bloomberg Livestock Total Return Sub-Index ETN COW, which features exposure to live cattle and lean hogs futures, has also been punished over the past 12 months. However, COW has strengthened in recent weeks.

Strong Dollar, Weak Dollar

“While the strong U.S. dollar is bad for commodities overall, it hurts far less than how much a weak dollar helps commodities. In the past 10 years on average, the U.S. dollar was pretty symmetrical with 58 periods of a rising dollar and 62 periods of a falling dollar, and in terms of the magnitude of gains and losses on average of -6.14 percent and +6.18 percent. When the dollar was up, brent crude lost 3.67 percent and (WTI) crude oil lost 4.00 percent with the worst average loss in nickel of -12.02 percent, far more than the single commodity average loss of -1.97 percent. However, when the dollar lost, not one single commodity fell on average and the single commodity gained 24.64 percent on average,” added Gunzberg.

S&P data indicate nickel is the worst-performing commodity in strong dollar environments. The iPath Bloomberg Nickel Subindex Total Return ETN JJN confirms as much with a one-year loss of 55.1 percent.