CRB Index falls to lowest since the 1995 revision, a road map for commodity-FX

• Thomson Reuters Core Commodity CRB Index a road map for commodity-FX.
• Oil and copper paint an alarming backdrop for the state of the world economy. 

With the Thomson Reuters Core Commodity CRB Index (CRB Index) trading between a range of 101.4820 and 112.284 (-10.50% at the time of writing at 106.29) we are witnessing history in the commodity sector.

For navigating G10 commodity-FX, (CAD, NOK, AUD, to some lesser extent, NZD as well), it helps to have an accurate representation of broad commodity price trends through the CRB Index.

The index was originally designed to provide a dynamic representation of broad trends in overall commodity prices. Its components and formula have been periodically adjusted to reflect changes in market structure and activity, and today, the index fell below the 1995 revision territories and even lower to as far back as some charts can go, (below the Jan 1994 levels). 

The fall in the commodity sector is pertaining to the global shutdown and measures taken to slow the spread of the novel coronavirus that has decimated world production, consumption and trade. this has ultimately lead to record lows in the price of oil and near to record lows in copper (both of which have been used as a barometer for the health of the global economy and trade). 

Oil makes up for the majority of the CRB Index and, yesterday, the May WTI crude futures price crashed below $0/bl for the first time in history to as low as $-37.63bbl, a day before expiry. The world's storage capacity is almost full - there is nowhere to store the supply and demand has been stripped while the global economy is shut down. 

Oil bulls not out of the woods yet

It could be argued that yesterday;s crash was a 25-sigma event, (due to a technicality), and indeed, we have seen a rebound in prices into expiry today. However, the July contract also plummeted today to $6.50 from yesterday's sturdy $22 handle.  So, it would seem the bulls are definitely not out of the woods, by any means.

"The risk of hitting tank tops in the key US delivery points such as Cushing remains a key concern and may continue to weigh on prompt prices and keep contangos elevated.The left tail remains wide in crude oil — we remain concerned that the steep roll costs associated with an extreme contango could catalyze a reversal in the large ETF position built over the past few weeks," analysts at TD Securities argued, adding:

"The steep contango, which of course is itself related to the massive actual and expected inventory builds, could even steepen further, which would ultimately translate into a large loss for those investors which are long — potentially, culminating in a capitulation."

Dr Copper prescribes a dose of lower prices for longer 

Meanwhile, the CRB Index is made up of 18 other commodities which are sorted into 4 groups, each with different weightings. The groups are as follows:

• As already mentioned, petroleum-based products which make up 33% of the weightings.
• Liquid assets.
• Highly liquid assets.
• Diverse commodities.

The commodities, other than crude oil, are aluminum, cocoa, coffee, copper, corn, cotton, gold, heating oil, Lean Hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas and wheat.

The FX space is mostly concerned for oil, gold and copper with such correlations to CAD, NOK, USD and AUD. The USD is picking up a safe haven bid which is being reflected in the price of gold, lower by 1% at the time of writing (well of its lows though $1,677 time of writing compared to $1,658 earlier). However, we are seeing weakness commodity-FX which stand to lose out along with EM-FX as the COVID-19 hard landing starts to kick in. 

BHP, an Australian leading global resources company, has lowered its targets for copper which front month's CME future contract is already teetering on the edge of a critical support zone a couple of days ahead of expiry, (third last business day of the contract month). Copper is regarded as Dr Copper by economists as market lingo for the base metal that is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy.  When you move out to the June contract, it's evident that the Dr. will be prescribing lower commodity prices for the foreseeable future and that is bound to hurt currencies such as USD/CAD, USD/NOK and USD/AUD. 

Further reading

• AUD/USD to struggle with USD demand and falling commodities

• Crude oil market: Stabilising forces ahead – Danske Bank

• IEA's Birol: OPEC+ supply cut insufficient to rebalance market immediately

• USD/CAD retreats to 1.4200 area as DXY rally loses steam