US DOLLAR THREATENS ITS 200-DAY AVERAGE -- CANADIAN MARKET BENEFITS FROM STRONG CURRENCY AND RISING COMMODITIES
DOLLAR TREND CONTINUES TO WEAKEN ... The weekly chart of the U.S. Dollar Index shows that the 2005 rally stopped at the spring 2005 peak just above 92. At the same time, the weekly MACD lines have "double topped" and turned negative. The USD has also broken an uptrend line going back almost a year. Chart 2 shows that the USD is nearing a test of another important support line and that's the 200-day moving average.
Chart 1
USD NEARS 200-DAY LINE ... The daily bars in Chart 2 show the recent break of the March/September support line more clearly. As a result, the USD is now bearing down on the (red) 200-day moving average. It was the move above that line last May (at 85) that helped signal the major upmove that took place throughout the balance of 2005. Any break of that line to the downside could signal that the major trend of the dollar is turning back down again. If the 200-day line is broken, the next downside target for the Dollar Index is last September's low at 86. The falling dollar has a lot of intermarket implication. For one thing, it's bullish for commodity markets and gold in particular. A weaker dollar also makes foreign stocks more attractive to American investors. That helps explain the recent upturns in gold and energy stocks as well as foreign ETFs. Foreign stock markets that have been hitting new record highs have two things in common. They have strong local currency markets and are producers of commodities. Those countries include Australia, Brazil, Canada, and Mexico. Canada is the best current example of the triple winning combination.
Chart 2
HOW CANADA IS A TRIPLE THREAT ... As a producer of natural resources, Canada is one of the big beneficiaries of the major bull market in commodities. Chart 3 shows the big double bottom in the CRB Index lasting from 1999 to 2002. The second trough was formed at the end of 2001 and, since then, commodities have been off to the races. Chart 4 shows the Toronto Index (TSE) bottoming in late 2002 (along with most other global markets). More importantly, the TSE/SPX ratio along the top of Chart 4 formed a "higher low" in 2001 and has been rising since then. That Canadian outperformance started with the upturn in commodity markets in late 2001 and is continuing to feed off commodity strength. Chart 4 also shows that the Canadian market has just exceeded its mid-2000 high to reach a new record. In addition to that strong chart action, the charts suggest that Canadian leadership will probably continue as long as the commodity bull market continues. Now let's consider currency trends.
Chart 3
Chart 4
Chart 5
Chart 6
STRONG CANADIAN DOLLARS BOOSTS EWC ... If we compare the chart of the Toronto Index (TSE) in Chart 4 to the Canadian iShares (EWC) in Chart 5, it can be seen that the EWC has done much better. In fact, the EWC hit a new record more than a year ago and is more than 30% above its 2000 peak. The EWC/TSE ratio at the bottom of Chart 5 has been rising since the end of 2002. That means that the Canadian iShares have done even better than the Canadian stock market. That's where the Canadian Dollar comes. Chart 6 shows the Canadian Dollar turning up during 2003 and rallying strongly since then. It's now at the highest level in more than a decade. That helps the Canadian market in two ways. It makes Canada more attractive to American investors since they reap the benefits of rising stocks and a rising local currency. Since the Canadian iShares are quoted in U.S. dollars, the EWC also benefits from rising Canadian stocks and a strong Canadian dollar. That makes the EWC an excellent way to benefit from both trends. It also makes Canada an excellent place to benefit from rising commodities and a weaker U.S. Dollar.
