One macro chart I am watching closely right now is the U.S. Dollar Index. The DXY has bounced off key support near $101, and that has had many ramifications across asset classes. Consider that the bump up in the greenback has coincided with rising Treasury yields and a pause in the 2023 stock market recovery. What’s more, foreign shares have given up some of their relative strength seen in January.
What makes the move up in the dollar key is that commodities tend to perform poorly when the USD is on the rise. But we didn’t really see that all the time last year. Why? Geopolitical tensions.
Russia’s invasion of Ukraine along with uneasiness with China led to a positive price relationship between the dollar and the CRB Commodity Index. Now, with more known, I expect the two to revert to their usual inverse correlation. So, a DXY bounce is bearish for commodities.
The Dollar Rallies Off Support
For background, according to Invesco, the Invesco DB Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC) is an actively managed exchange-traded fund (ETF) that seeks to achieve its investment objective by investing in commodity-linked futures and other financial instruments that provide economic exposure to a diverse group of the world’s most heavily traded commodities.
PDBC seeks to track an index comprised of 14 commodities spanning the spectrum from energy to precious metals to industrial metals to the ags. Its tradeability is solid in my view, with a 0.07% median bid/ask spread and 30-day average trading volume of more than 5 million shares. The annual management fee is 59 basis points – not overly costly – while the total expense ratio sums to 0.64%.
The portfolio is oriented toward energy, with nearly half the ETF in oil and gas. So, it’s key to monitor developments in the oil market above all else.
PDBC: Heavy in Energy Commodities
Looking at price action in black gold, WTI is stuck in a range from near $70 to the low $80s. A breakout or breakdown from this zone is what you should be watching if you own or plan on trading PDBC. For now, it is a wait-and-see approach.
But oil’s resiliency in the face of a dollar that is perking back up is something to note, and I acknowledge this is a bullish technical feature. Fundamentally, improving global growth prospects leans bullish oil, particularly if China’s reopening remains on track.
Crude Oil: Monitor This Range
PDBC pays large distributions at the end of the year, so I prefer to look at the chart of the CRB Index itself when doing technicals in the short run right now. Notice in the chart below that, like oil, the CRB is in a tight range after notching highs during the middle of 2022.
Technicals 101 says that these consolidations typically resolve in the trend of a larger degree, which I would argue is down given the big June decline last year. Also, take a look at the 200-day moving average – it is now solidly on the decline as the price is below the trendline. They say nothing good happens below the 200-day, and I assert that applies here.
Until the index rises above the 200-day and recent range highs, I am still bearish on commodities, and, thus, PDBC.
CRB Index: Falling 200-Day Moving Average
Bullish Catalyst: Better Global GDP Growth
Asset Class Returns By Year: Commodities First to Worst
The Bottom Line
There are fundamental reasons to like commodities right now considering more sanguine global GDP growth forecasts, but price action is still soft on the CRB Index and PDBC. I would wait for clearer signs of an established uptrend before buying in.