RECORD US TRADE DEFICIT BOOSTS FOREIGN CURRENCIES -- THAT'S HELPING CANADIAN AND JAPANESE ETFS -- RELATIVE STRENGTH CHARTS SUGGEST THAT JAPAN IS STARTING TO RISE AGAIN -- CHARTING GOLD IN FOREIGN CURRENCIES

CANADIAN DOLLAR AND JAPANESE YEN ARE BOUNCING ... Two of the weaker foreign currencies of late have been the Canadian Dollar and the Japanese yen. [Both are included in the Dollar Index basket]. Today's announcement of a record U.S. trade deficit for 2006 (which was even higher than expected) is causing some dollar selling and buying of foreign currencies. Chart 1 shows the Canadian Dollar trading at a one-month high and challenging its 50-day average. Chart 2 shows the Japanese yen bouncing for the first time in five days. Certainly not enough to turn its trend higher. But maybe enough to suggest the early stages of a bottom. If those currency bounces continue, it carries positive news for the stock market ETFs of their respective countries.

Chart 1

Chart 2

CANADA ISHARES ARE PLAYING CATCH UP ... Chart 3 shows the Toronto Composite Index having already cleared its December high to reach a new record. Chart 4 shows that the Canada iShares (EWC) have yet to do so. But they may be about to. That's because the blue line on Chart 4 is starting to rise. The blue line is a ratio of the EWC divided by the TSE. The falling ratio since November meant that the iShares had been underperforming the cash market. The ratio is now rising, however, which means that the EWC is starting to do better than the TSE. The reason for the EWC improvement is the fact that the Canadian Dollar (green line below Chart 4) is starting to rise as well. As I explained recently, a foreign stock market ETF does better than its cash market when its currency is rising. That may be the case in Canada. And maybe even in Japan. That means that both countries' iShares are starting to look more attractive.

Chart 3

Chart 4

JAPANESE MARKET CLOSES AT SEVEN-YEAR HIGH ... After a holiday on Monday, the Nikkei 225 rose 117 points today (+.67%) to close at 17621 which is a new seven-year closing high (Chart 5). Chart 6 shows the Japan iShares (EWJ) gapping up 1.9% today to make it the day's strongest foreign ETF. It's on the verge of a nine-month high. Two of the factors supporting the EWJ jump are Japanese shares themselves and a bouncing yen. I recently showed that the weak yen (orange line) was causing the iShares to underperform the Nikkei. Any new signs of the strength in the yen would give a big boost to the EWJ relative to the Nikkei.

Chart 5

Chart 6

JAPAN IS STARTING TO RISE AGAIN ... One of the reasons that I'm focused on Japan is that it's beginning to show new signs of relative strength after a year of subpar performance. At least that's what the next two charts suggest. Chart 7 is a ratio of Japan iShares (EWJ) divided by S&P 500 SPDR (SPY) over the last year. The ratio peaked last May. From then until the end of November, the EWJ underperformed the U.S. market. At the end of 2006, however, the EWJ:SPY ratio broke that trendline and has been trading sideways since then. The ratio may be ready to resume its new uptrend. It's coming at a logical time as well. Chart 8 plots the same EWJ:SPY ratio since the start of 2002. The 2006 decline brought the ratio right back to its five-year up trendline where it's starting to bounce again. That suggests to me that Japan may be a good place to start investing again. A bounce in the yen would give American investors an added boost.

Chart 7

Chart 8

GOLD AT RECORD HIGH IN YEN TERMS ... Gold is another potential beneficiary of a weaker dollar. Gold prices are rising again today. Chart 9 shows that the streetTracks Gold Trust (GLD) shares are still testing their spring high. A close above that chart barrier is needed to turn the trend upward. One of our readers asked what gold would look like in foreign currency terms. Chart 11 shows gold hitting a new high quoted in yen. The reason for the better performance in Chart 10 is because the yen has been so weak. Chart 11 shows gold having cleared its spring highs in terms of a weaker Canadian Dollar. Gold's weakest picture comes when it's quoted against the Euro (which has been the strongest of the currencies) in Chart 12. A hallmark of a bona fide bull market in gold is its ability to rise in terms of all major currencies. [These charts are created by dividing GLD by the foreign currency].

Chart 9

Chart 10

Chart 11

Chart 12