CANADA BENEFITS FROM RISING COMMODITIES -- CANADA ISHARES ALSO BENEFIT FROM RISING CANADIAN DOLLAR -- AUSSIE DOLLAR HITS SEVENTEEN YEAR HIGH -- FALLING DOLLAR AND RISING COMMODITIES ARE BULLISH FOR COUNTRIES THAT EXPORT NATURAL RESOURCES
RISING COMMODITIES BOOST CANADIAN MARKET ... Last Friday I mentioned that a falling dollar was good for foreign stocks. I also mentioned that rising commodities were especially good for commodity exporters like Australia, Canada, and Latin America. All three have been global leaders early in 2007. I'm going to focus on Canada today. The daily bars in Chart 1 show the Toronto Index (TSE) hitting a new record high over the last week. The TSE/SPX ratio (blue line) at the bottom of the chart has been rising for the last six months. That tells us that Canadian stocks have been rising faster than the US. Part of the reason for that has to do with the orange line below Chart 1. It's the Continuous Commodity Index (CCI). Notice the close correlation between the two lines. The drop in commodities from August through September caused underperformance by Canada. The commodity bottom last October started the last period of Canadian outperformance. That tells us that the Canadian market is very dependent on the direction of commodity prices, which right now is up. But there's more.
Chart 1
RISING CANADIAN DOLLAR BOOSTS CANADA ISHARES... Chart 2 compares the price action between the Toronto Index (price bars) and Canadian iShares (blue line). Naturally, the two lines move in the same direction. But not at the same speed. The blue line below Chart 2 plots the EWC divided by the TSE. Throughout most of last year, the EWC/TSE ratio fell as the EWC underformed the TSE. Since the start of the new year (and especially over the last month), however, the EWC has done much better than the TSE (a rising ratio). The reason for that is the green line at the bottom of Chart 2. That's the Canadian Dollar. Notice the close correlation between the two lines. When the Canadian Dollar is falling (relative to the U.S. Dollar), the EWC underperforms. When the Canadian Dollar is rising (which it is now), the EWC outperforms. The reason for that is simple. The EWC is quoted in U.S. Dollars, while the TSE is quoted in Canadian. A foreign ETF always does better than its equivalent cash index when the local currency is rising against the U.S. Dollar. That means that Canada iShares are benefiting from a falling U.S. Dollar, a rising Canadian Dollar, and rising commodity prices. The same is true of Australia which is acting much better than Canada.
Chart 2
AUSTRALIAN DOLLAR HITS NEW HIGH ... Chart 3 shows the Australian Dollar trading at the highest level since 1990. It is the strongest currency in the world. The reason for that is interest rates in excess of 6%. Australia is also an exporter of natural resouces and benefits from rising commodity markets. That has a lot to do with why the Australian stock market is trading at a record high. The surging Aussie Dollar explainS why Australia iShares (EWA) are doing even better.
Chart 3
MORE GROWTH OVERSEAS ... For the first time in years, the IMF is predicting that foreign economies will continue to grow while the U.S. economy is expected to slow. Stronger economies produce higher interest rates. Higher foreign rates boost foreign currencies. The president of the ECB today announced a likely European rate hike in June. That explains why the Euro is trading at a record high against the yen and a two-year high against the dollar. With the U.S. economy slowing, it's going to be difficult for the Fed to raise rates. That's bearish for the dollar. A weak dollar boosts commodities. The best way to play that is by buying commodity-related assets and foreign stocks that produce those commodities. A weaker dollar (and stronger local currencies) make foreign stock ETFs an even better buy than their respective cash markets.
