U.S. Dollar versus West Texas Intermediate Crude

Above is a seven‐year chart showing the U.S. Dollar Index plotted along with an actively traded crude oil futures contract. It is easy to see the negative correlation between the U.S. dollar and oil, where oil bottoms as the U.S. dollar peaks and vice versa. This inverse relationship has existed for decades. Since commodities and oil are priced in U.S. dollars, a rising U.S. dollar causes these commodity prices to fall. If crude oil prices can remain above $70/barrel, then this chart signals that we should see oil rally in the coming weeks. As is evident, the U.S. dollar is coming up against old highs established in 2010 and 2009. At that level, the U.S. dollar could reverse down, and produce a rally in oil (and possibly other commodities). Since 2011, we have also seen a positive correlation between commodities and equities, the implication being, higher commodity prices generally signal higher future production activity. So we believe a rally in the oil/commodity complex could put some wind in the back of the U.S. stock market.

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