USD Weakness Dominates as Commodities and Crypto Market Soar

So far, mid-January has started to shape up into a more exciting period for the markets in comparison with the first week of the year. Gold prices passed through the $1,900, Bitcoin rose above $21k, while copper hit the $9,000 per ton mark for the first time since June as China started to re-open its economy.

Meanwhile, S&P 500 regained its status above the 4,000 mark after CPI cooled in December, while the US dollar index has come a long way since its all-time peak in September 2022, losing more than 11% from that high as can be seen from the below EUR/USD screenshot from Quadcode Markets trading platform.

Lower Inflation and Softer Monetary Fed Policy in the New Year

The New Year brings a softer Fed monetary policy as US inflation is cooling down significantly as per analyst expectations and the aggressive rate hikes of 2022 seem to be a thing of the past.

Similarly, the strength of the US dollar seems to be a thing of the past as the Fed slows the rate hikes into smaller and less frequent events. With that said, the worst is over in regards to Fed tightening and as a result, the US dollar has begun to weaken across the board.

EUR/USD bottomed in September 2022 after reaching a low of 0.9535 below the parity level and has since then appreciated in value by more than 13.5% as the US dollar strength started to unwind.

I do believe that the USD on a macro outlook could bounce back in the next 4-8 weeks but overall feel that it’s headed south. With the Fed apparently left with fewer things to do as long as US CPI continues to cool down, and with other central banks starting to play catch up in rate hikes, 2023 could be a year, that the US dollar may likely weaken further and possibly stabilize as other major currencies start to catch up, both in terms of interest rate yields and value appreciation.

More Optimism in the Stock Market

Meanwhile, the stock market started the year in a mixed mood. But after the US CPI fell to 6.5% from 7.1% on January 12, the stock market gained a positive direction. Many stocks have posted substantial gains since then but the most dramatic gains were posted by Coinbase stock which rose by 52% since the start of the year while Bitcoin rose 27% since the same period. In the chart below, we can see the recovery of Coinbase stock which lost 88% of its value in 2022 is quite steep.

Commodities in 2023

Market analysts and experts have been increasingly optimistic about gold for 2023 because of a number of factors – geopolitical risks, strong buying appetite by central banks, the US dollar weakness, and the Fed’s second stage of monetary policy tightening which could be the conclusion phase that could end by the end of 2023.

The inverse correlation with the US dollar is significant and can support gold prices in 2023 as long as USD weakness prevails in the coming months. Meanwhile, with rising gold, there is usually rising silver.

Silver, while having different industrial usage and demand in gold, is also a precious metal used for preserving wealth and in jewelry. Certain correlation between gold and silver causes the two to move in the same direction with a silver offering higher percentage jumps in absolute terms than gold due to its lower price, making it more attractive for aggressive traders but also riskier at the same time.

On the commodity front, it’s worth watching copper as its bullish momentum is impressive. It surpassed the $9,000/ton mark in less than 2 weeks since the state of 2023 on optimism that the re-opening of China could increase demand for the metal in a sustainable manner.

China’s GDP growth in Q4 has been impacted by zero Covid tolerance policies but, as these policies are gradually lifted and becoming a thing of the past, change could be very well laying ahead of the road.

Copper, besides being used almost everywhere – from electronics, wire, electric vehicles, and various other industrial uses – is also used by economists as an indicator of economic growth. When copper demonstrates a strong demand, it leads to positive economic moves ahead, and when the demand is weakening this could be an early alert of a potential economic slowdown. So far, despite all the recession warnings, demand for copper seems to be picking up as can be seen from its explosive move in the past couple of days.

Copper, gold, the stock market, and Bitcoin are gaining higher ground at the start of 2023, while the USD dollar seems poised to continue to weaken, barring any surprises from the Fed or any unexpected geopolitical risk.

China re-opening is boosting demand for raw materials including copper and oil, as well as investment growth expectations for the year. The last statistic says when January ends on a positive note in the stock market, the whole year can end on a positive note. So far, by mid-January, this seems to be well within grasp, barring any unexpected surprises.

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*information regarding past performance is not a reliable indicator of future performance.

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