COMMODITY-BASED CURRENCIES LIKE THE AUSTRALIAN AND CANADIAN DOLLARS ARE THE STRONGEST IN THE WORLD
AUSTRALIAN DOLLAR IS LINKED TO INDUSTRIAL METALS... An article on page C1 of the Wall Street Journal today was entitled "Dollar Suffers Most Against Currencies Tied to Commodities". I've discussed this before but it's worth repeating. First of all, a bull market in commodities is usually associated with a bull market in foreign currency markets. That's because both markets go up when the dollar goes down. Not all foreign currencies are equal however. Certain currencies are closely tied to the trend of commodity markets. Those currencies belong to countries that are exporters of natural resources. The two most prominent are the Australian and Canadian Dollars. Others include the Chilean peso, the New Zealand Dollar, the South African rand, and even the Russian ruble. Since Australia is a big exporter of industrial metals, it's no surprise to see those two markets linked together. Charts 1 and 2 show that the Australian Dollar and Industrial Metals prices trend together. Both started dropping during 1997 in the midst of the Asian currency crisis and gave an early deflation warning. Both troughed at the end of 2001 and have been rising together since then. That reflects the global trend away from deflation to reflation. The Aussie Dollar has appreciated 60% against the dollar.
Chart 1
Chart 2
CANADIAN DOLLAR VS. CRB INDEX... Charts 3 and 4 show the close correlation between the Canadian Dollar and the CRB Index of seventeen commodity markets. Since the start of 2002, both markets have risen strongly together. Notice also that both markets exceeded their 1996 highs to reach the highest levels in a decade. When the dollar is weak, American investors benefit from investments in countries with the strongest currencies. Canada is a good example of that. Not only has the Canadian stock market been stronger than ours over the past couple of years, American investors also benefit from the strong Canadian Dollar. [The effects of commodity prices on commodity-based currencies are discussed in Chapters 5 and 10 of my new book on "Intermarket Analysis"].
Chart 3
Chart 4
EFFECTS OF RISING COMMODITIES ON ASIA... The G7 didn't say too much over the weekend. They did, however, clarify last September's call for flexible exchange rates. They made it clearer this time that they were referring specifically to Asia -- not Europe. The Europeans are bearing the brunt of the falling dollar. The U.S. wants a weaker dollar. That pushes the Euro higher and hurts their exports to the U.S. The Europeans want us to raise rates; we want them to lower theirs. At the same time, several Asian countries have their currencies pegged to the dollar (including China). Even though the yen has been appreciating since last September, the Japanese central bank has been buying a lot of dollars to keep the yen from rising too fast. All of those dollars being bought in Asia are being reinvested in U.S. Treasuries, which is keeping our rates down. If the Asians let their currencies float freely, they'll buy fewer dollars and fewer Treasuries. Today's WSJ article offers another scenario. Dollar-based commodities are becoming a lot more expensive for Asian buyers like China. One way to control their cost of rising material prices is to allow the value of their currencies to rise. That would weaken the dollar, but boost U.S. interest rates. Something to think about. [The possible negative side-effects of Asian currency revaluation is also discussed in my new book].
