“Commodity prices have traded in a strong inverse relationship with the U.S. dollar over the past decade or so, but this relationship broke down in late 2016 and the breakdown looks here to stay,” analysts wrote in a note released on Monday.
Case in point—commodities generated strong returns in the fourth quarter of 2016 with the Goldman Sachs Commodity Index moving 9 percent higher despite a stronger greenback which gained about 7 percent against major currencies.
“While it’s not uncommon for commodities and USD to rally or sell off at the same time, especially when we look at their returns at a higher frequency (daily or weekly), 4Q 2016 was actually the first quarter in more than a decade to see such a sizable divergence,” the analysts added.
Key commodities traded globally such as crude oil, gold, copper and softs like wheat are typically priced in dollars, with liquidity often favor the major exchanges in New York, London and Chicago as centers of trade. But the impact of a stronger dollar on trade terms has not followed a set pattern in the past few years, Citi said.