Following months of good price performance, even commodities had started to weaken in September, a challenging development for CFD traders active in these instruments. The main takeaway during the past few weeks had been the bottoming and the rise of the US dollar, which had acted as a headwind for all asset classes. We’re now seeing that a rising dollar during a time of economic uncertainty can damage fragile asset performance, which is why we want to talk on the matter more broadly.
# Lower demand prospects as COVID-19 cases rise
Before we get to the rising dollar, we need to talk first about the demand for commodities looking forward. Several Western European countries had already started to reimpose restrictions, due to rising COVID-19 cases. Investors had started to price in a weaker economic recovery, considering the demand for goods and services might be under question until things get back to normal.
Despite massive fiscal support around the world, consumption continues to remain below the 2019 peak, a reason to consider as the commodities momentum weakens.
# Risks of a US dollar short squeeze
When it comes to the US dollar, it had put a dent on the oil price, industrial commodities, and precious metals, in particular. We have to keep in mind that 40% of global trade is in dollars and any meaningful change in the currency market can have massive implications. Risks are amplified by how most traders and investors had been positioning for months, anticipating strong dollar weakness due to large fiscal spending and debt monetization in the US.
If the dollar continues to rise, we could start to see a short squeeze starting to unfold and that won’t benefit commodity CFDs in the near term. A tech rout and weakness in stocks, combined with lower risk appetite is a key issue and a major dollar spike should not be taken out of the equation before the US election.
# Dampened economic activity
There continues to be a major split on economic activity. Although restrictions had been eased, not all people are confident to get out and spend, creating a difficult situation for governments. Trust won’t be restored until a cure for COVID will be found, so in the meantime, CFD traders will need to deal with conditions are they are. Share your thoughts on the US dollar in the comments section below, because we are more than welcome to get feedback.