The Fed’s dovish tilt, communicated via the FOMC Statement has served as a catalyst for broad based weakness in the dollar vs. other G-10 FX (Figure 1). Broad based dollar weakness is:
- Bullish for Gold, Commodities, TIPS, Emerging Markets (EM) markets, and EM FX
Forward looking market indicators are responding. A weaker dollar generally leads to higher inflation and higher commodity prices. We are already seeing market-based indicators for inflation responding in a pro-growth, inflationary manner. This price action is especially informative as this fundamental shift in policy is intersecting with important technical levels. While these developments are in early stages, they are notable –
- The US dollar Index (DXY) is now breaking down and challenging an important uptrend in place since the start of 2018 (Figure 2). If this intermediate uptrend is broken, it is likely that commodity markets will move up in price as well
- Gold is confirming that inflation spirits are stirring and yesterday reached a multi-year high (Figure 3), while at the same time breaking out of a long-term trading range. It would be reasonable to expect gold to continue to move meaningfully upward in the months ahead. The CRB Commodity Index (Figure 5) is on the verge of breaking a decade long downtrend – this development is worth watching closely.
- The market for Treasury Inflation Protected Securities (TIPS) is also responding to the FOMC statement. TIPS break-evens have moved upward after a rough May. This price action validates the Fed’s shift in posture. The Fed wants inflation above 2%, and market-based indicators are responding.
Figure 1: G-10 Currencies Returns
Source: Bloomberg, accessed 6/21/2019
Figure 2: 10 Year TIPS Breakevens
Source: Bloomberg, accessed 6/21/2019
Figure 3: CRB Commodity Index
Source: Bloomberg, accessed 6/21/2019
Figure 4: US Dollar
Source: Bloomberg, accessed 6/21/2019
Figure 5: Gold
Source: Bloomberg, accessed 6/21/2019
Jonathan E. Lewis
Chief Investment Officer
INDEX DEFINITIONS
The Commodity Research Bureau (CRB) Index acts as a representative indicator of today’s global commodity markets. It measures the aggregated price direction of various commodity sectors.