Pro Perspectives 10/26/22

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October 26, 2022

Last Friday, the BOJ intervened in the currency markets (defending the value of the yen). It turned the tide of markets that day: stocks higher, yields lower, commodities higher and the dollar broadly lower.

And that has become a trend this week.

Importantly, we discussed the prospects that this intervention could mark a top in the dollar.

That would be meaningful for commodities prices.

And commodities prices have been on the move. So have commodity stocks.

Let's look at a few charts …

Above is the dollar index. As you can see, the absolute top of this 20% rise in the dollar this year, was the day the Bank of England intervened to save the UK government bond market. That reversed a free fall in the pound. And then the BOJ was in, explicitly to stop the free fall in the yen.

As we've discussed here in my daily notes, historically major turning points in markets come with some form of intervention. Again, a turning point in the dollar, would mean a turning point in commodities.

Remember, on Friday, we looked at the CRB index of broad commodities prices.

Here's what that looks like now …

The trend in this young structural bull market in commodities is well intact. And no coincidence, it started a month after the fiscal and monetary bazookas were fired in 2020 (inflationary policies).

A bounce in commodities from this big trendline would align with a top in the dollar.

What does that mean for oil prices? Higher.

This commodities/dollar relationship comes as the Biden administration's program to drawdown 180 million barrels of oil from the Strategic Petroleum Reserve has come to an end — as of yesterday! This will remove the downward pressure on oil prices. And the resumption of the move in oil will be coming from a high base of the mid $80s.

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