HIGH-YIELDING FOREIGN CURRENCIES CONTINUE TO TUMBLE -- THE RISING DOLLAR KEEPS COMMODITIES UNDER PRESSURE -- ALUMINUM AND COPPER SUFFER FROM GLOBAL WEAKNESS -- DOLLAR AND YEN ARE ONLY TWO RISING CURRENCES

FOREIGN WEAKNESS HURTS CURRENCIES ... The Fed started lowering interest rates more than a year ago to stem the financial crisis in the U.S. Foreign central banks didn't follow along, while some even raised rates. With foreign economies weakening along with the US, the belief is that foreign central banks are going to have to start lowering rates more aggressively to catch up to the U.S. easing program. That's pushing foreign currencies sharply lower (except for the yen). The Canadians lowered short-term rates a quarter point today which pushed the Canadian Dollar to the lowest level in three years (Chart 1). The Australians recently lowered by a full point and are hinting at more to come. That's pushed the Aussie Dollar to a five-year low (Chart 2). The British Pound is trading today below 170 for the first time since 2003 (Chart 3). The Euro has fallen to the lowest level against the U.S. dollar in nineteen months (Chart 4). In case you're wondering why the dollar is rising, that's the reason. It has more to do with foreign weakness than U.S. strength. That's having a twofold negative effect on commodities. First, the rising dollar is keeping commodities on the defensive. Second, reduced global demand is bad for certain commodities like oil and copper. Copper is also being hurt by reduced demand from a weakening Chinese economy.

Chart 1

Chart 2

Chart 3

Chart 4

RISING DOLLAR HURTS COMMODITIES ... One of the most consistent intermarket principles is that commodity prices trend in the opposite direction as the dollar. Chart 5 shows that the commodity bull market started in 2002 just as the dollar was peaking. Since mid-2008, however, those two trends have reversed. A rising dollar (or falling foreign currencies) has pushed the CRB Index to the lowest level in nearly four years. The main impetus for the commodity plunge has been fears of a global recession. Commodity prices fall during recessions. They fall especially hard if the recession is global in scope. That's especially true of industrial commodities like aluminum and copper which are tied to the global economy. And to China in particular.

Chart 5

FOREIGN WEAKNESS HURTS INDUSTRIAL COMMODITIES ... Aluminum and copper are very much tied to the trend of the global economy. Charts 6 and 7 show the two sides of that relationship. Aluminum and copper benefited from the global boom from 2003 to 2007. Both have suffered from the 2008 global bust. Chart 6 compares aluminum to EAFE iShares. The plunge in foreign shares during the first half of 2008 no doubt contributed to aluminum tumbling to a three-year low and losing more than a third of its value since mid-year. Charter 7 shows China iShares peaking a year ago. Tumbling Chinese shares in 2008 warned of a weaker Chinese economy which would in time hurt demand for copper and other commodities. In today's trading, copper dropped below $200 a pound for the first time since December 2005. Chart 7 also shows copper's peak coinciding with a plunge in the Australian Dollar (top of chart) which is closely linked to industrial commodities.

Chart 6

Chart 7

THE DOLLAR AND YEN ARE RISING ... The only two currencies benefiting from global weakess are the U.S. Dollar and the Japanese yen. Chart 8 shows the Power Shares US Dollar Bullish ETF (UUP) hitting a new 52-week high. Chart 9 shows the CurrencyShares Japanese Yen ETF (FXY) also rising. During the foreign currency boom from 2002 to 2007, the yen was the world's weakest foreign currency (with interest rates near zero). Over the last year, that trend has reversed as risk averse traders have abandoned higher yielding currencies and now favor lower yielding ones like the yen. The yen has been rising since mid-2007 as the "yen carry trade" started to unwind which required the selling of higher-yielding global assets to cover yen shorts. That also marked the end of the global bull market in stocks. Unfortunately, the rising yen doesn't help Japanese stocks. In fact, it's a negative since it hurts Japanese exports.

Chart 8

Chart 9