DOLLAR STILL LOOKS TOPPY -- THAT'S GOOD FOR GOLD AND FOREIGN ETFS
DOLLAR IS STALLING NEAR 90... Not too long ago I wrote about the U.S. Dollar Index having reached a major resistance zone ranging from 90 to 92. Those were the peaks hit during the first half of 2004. I also wrote about the dollar being in a major overbought condition. Both of those conditions are still present as is the fact that the dollar started to weaken right around this time last year. So there may also be seasonal component as well working against the greenback. The weekly bars in Chart 1 show that the USD has been stalled for the last four weeks below that 90 level. At the same time, major foreign currencies are in oversold conditions and appear to be bottoming. That includes the Euro, the yen, and the Canadian Dollar. All of those currencies are trading higher again today. Two groups that benefit the most from a weaker dollar are commodity markets, especially gold, and foreign stock ETFs. Gold started to rally near the end of July. And a lot of foreign ETFs had better Julys than the U.S. That usually happens with a lower dollar.
Chart 1
EURO STRENGTH HELPS GOLD AND CRB ... The Euro has been finding support along last year's lows in the 118-120 zone since mid-June and has been in an oversold condition. In today's trading, the Euro is trading above its 50-day average for the first time in at least four months. Euro strength usually translates into dollar weakness. It usually also translates into higher prices for gold and other commodities. Chart 3 shows the Gold ETF (GLD) climbing the equivalent of $3.10 today and trading back over its 200-day moving average. Most other commodities are rallying as well. Chart 4 shows the CRB Index trading over 315 for the first time since March. Crude oil is trading over a dollar higher and is nearing its 2005 high at 62. Higher commodity prices usually feed on a weaker dollar.
Chart 2
Chart 3
Chart 4
WHY EAFE IS RALLYING ... Back on July 8, I wrote a story with the headline "Why a Weaker Dollar Could Boost Foreign Returns" July 08, 2005. That was followed on July 11 by another story headlined: "Selling in Overbought Dollar Boosts Gold and Foreign Markets". The gist of both stories was that new buying in foreign ETFs was hinting at a weaker dollar. That's because foreign ETFs generally do much better when the dollar is weakening. The next chart is an updated version of a similar chart posted on July 8. I pointed out that the EAFE Index iShares were just starting to bounce off their 200-day moving average. Since then, they've climbed to a four and half month high. The two lines below the price bars show why that's happening. The upper line is a ratio of the EAFE divided by the S&P 500. The EAFE had been weakening against the S&P since mid-March, but started to do better during July. The bottom line plots the Dollar Index. You can see that the EAFE/SPX ratio moves in the opposite direction of the dollar. When the dollar is rising, foreign ETFs underperform. When the dollar weakens, they outperform. Since foreign ETFs are starting to outperform the U.S., I take that as an early sign that global investors are expecting a weaker dollar.
Chart 5
GLOBAL LEADERS ... If you click on John's Latest Performance Chart, you'll see those foreign ETFs that did better than the U.S. market during the month of July in descending order. Four of the top foreign ETFs are in Asia: South Korea (EWY), Malaysia (EWM), Singapore (EWS), and Hong Kong (EWH). Their July gains are partially the result of the Chinese yuan revaluation. Mexico (EWW) led a strong Latin America. That was partially due to a strong peso. European leaders that outpaced the U.S. were Germany (EWG), France (EWQ), and Spain (EWP). I can only surmise that was based on hopes for a strong Euro. Canada also did better than the S&P during July and was helped by rising commodities and strong Canadian Dollar. Chart 6 shows the Canadian iShares (EWC) climbing to a new 2005 high. The ratio line on top shows Canadian outperformance since May when the ETF bounced off its 200-day average. The line on the bottom shows the Canadian Dollar also turning up during May. That's what you want to see in a foreign ETF -- rising stocks and a rising currency.
Chart 6
Chart 7
RISING EUROPE ETF HINTS AT HIGHER EURO ... Chart 7 shows the Europe 350 iShares (IEV) turning up during July. Their ratio line versus the U.S. (on top of chart) appears to have bottomed as well. Their appears to be a positive correlation between the IEV/S&P ratio line and the Euro (bottom line). New strength in Europe appears to be hinting at a higher Euro. And the Euro is the most heavily weighted foreign currency in the Dollar Index. The message of this story is twofold: If the dollar is peaking (as I suspect it is), foreign ETFs should do better than the U.S. market. A weaker dollar should also give a boost to commodity markets and stocks tied to those commodities.
