Relation Between U.S. Dollar and Ag Markets
(DTN) Grain trade increasingly has been characterized as a risk on or risk off depending on what is happening with the outside markets. With a dearth of fundamental news, the CME grain and oilseed contracts have seen their price action mostly influenced by the direction of the stock market, crude oil and, most importantly, the foreign exchange value of the U.S. dollar.
The inverse relationship between commodity prices and the value of the greenback has been well documented and is based on almost all commodities being valued in dollars. A weaker U.S. currency strengthens dollar-denominated commodities by making them less expensive to foreign importers and vice-versa. This relationship has been further accentuated by the speculative crowd buying commodities over the past few years in concert with a constantly depreciating greenback.
To test how strong this relation is, we looked at the correlation coefficients for all the grain markets traded at the CME compared with the value of the U.S. Dollar Index over time periods ranging from three months to three years. A look at the data shows that although all markets are somewhat inversely correlated with price movements of the Dollar Index, some, such as corn, have a stronger relationship.
With all the gyrations in the outside markets over the past month, all of the grain contracts show a strong inverse relationship, led by soybean meal at 89.2%. On average, corn appears to have the highest correlation with the Dollar Index, with an average coefficient of 74.5% over all time periods, followed by soybeans at 65.7%, with wheat the laggard at 54.1%.
With the fundamentals cloudy at best, perhaps the best trading strategy is to figure out future dollar direction and then trade the grain markets from the opposite side.
http://www.dtnprogressivefarmer.com
The inverse relationship between commodity prices and the value of the greenback has been well documented and is based on almost all commodities being valued in dollars. A weaker U.S. currency strengthens dollar-denominated commodities by making them less expensive to foreign importers and vice-versa. This relationship has been further accentuated by the speculative crowd buying commodities over the past few years in concert with a constantly depreciating greenback.
To test how strong this relation is, we looked at the correlation coefficients for all the grain markets traded at the CME compared with the value of the U.S. Dollar Index over time periods ranging from three months to three years. A look at the data shows that although all markets are somewhat inversely correlated with price movements of the Dollar Index, some, such as corn, have a stronger relationship.
With all the gyrations in the outside markets over the past month, all of the grain contracts show a strong inverse relationship, led by soybean meal at 89.2%. On average, corn appears to have the highest correlation with the Dollar Index, with an average coefficient of 74.5% over all time periods, followed by soybeans at 65.7%, with wheat the laggard at 54.1%.
With the fundamentals cloudy at best, perhaps the best trading strategy is to figure out future dollar direction and then trade the grain markets from the opposite side.
http://www.dtnprogressivefarmer.com
Posted by Colvin & Co. at 12/12/2011 5:30 AM 
Categories: Economic Growth
Tags: agriculture farmland commodities farming Weather inflation dollar
Categories: Economic Growth
Tags: agriculture farmland commodities farming Weather inflation dollar
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