WEAK DOLLAR BOOSTS COMMODITIES, STOCKS, AND FOREIGN SHARES -- RISING AUSTRALIAN DOLLAR IS SIGN OF OPTIMISM -- GOLD BREAKS OUT AND INCREASES ODDS FOR CRB UPTURN -- FOREIGN SHARES CLEAR 200-DAY LINE AND ARE PLAYING CATCH-UP TO THE US
DOLLAR INDEX HITS THREE-MONTH LOW... The U.S. Dollar Index peaked a month ago and has been falllng since then. It fell to the lowest level in three months today. That has a lot of important intermarket implications. The most direct beneficiaries are commodities -- and gold in particular. Chart 2 shows Gold Trust Shares (GLD) rising 1.5% today after having recently broken a down trendline drawn over its September/November highs (and on rising volume). Most other commodities should follow in the same direction. Two reasons why are that commodity currencies have already broken out, or are close to doing so.
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Chart 1
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Chart 2
AUSTRALIAN DOLLAR HITS SIX-MONTH HIGH ... Last Tuesday's message wrote about the close correlation between the Canadian Dollar and commodity prices. Chart 3 shows that currency in the process of testing its 200-day moving average and its October high. An upside breakout would be bullish for that currency and commodity markets which usually trend in the same direction. The Australian Dollar has already turned up. Chart 4 shows the XAD trading at the highest level in six months. A strong Aussie Dollar is considered to be a vote of confidence for that stock market, commodities, and the Pacific Rim in particular. China is a big importer of Australian commodities.
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Chart 3
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Chart 4
AUSSIE DOLLAR LEADS COMMODITIES HIGHER... Australia is one of the world's biggest exporter of commodities (as is Canada). So its fortunes are closely tied to the trend of commodities. Historically, the Aussie Dollar has had a close correlation with commodity prices. Chart 5 compares the two markets over the last two years. After bottoming together in mid-2010, both markets peaked last May and entered a downside correction. Both then hit bottom last October and have been bouncing since then. The ability of the Aussie Dollar (green line) to hit a six-month high increases the odds for an upside breakout in the CRB Index (brown line). Chart 6 shows the DB Commodities Tracking Index Fund (DBC) challenging its November high and 200-day average (red line). That's exactly what the Canadian Dollar is doing in Chart 3. Another factor favoring an upside breakout in commodities is the fact that global stocks are rallying.
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Chart 5
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Chart 6
EAFE AND EMERGING MARKETS ISHARES CLEAR 200-DAY LINES... Foreign shares are finally playing catch-up with the U.S. stock rally. Charts 7 and 8 show EAFE iShares (EFA) and Emerging Markets iShares (EEM) having cleared their 200-day moving averages. The EEM has also cleared its October high. Part of the reason for their recent strength has been the falling dollar. The relative strength ratios (below both charts) show them rising faster than the U.S. over the last month. Part of the reason for that is the recent drop in the U.S. Dollar (green line). The rising dollar between August and early January caused foreign shares to lag behind the U.S. The falling dollar is now having the opposite effect and is giving an added boost to foreign shares. That's good for foreign shares and those in the U.S. because it confirms that the rally in stocks is truly global.
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Chart 7
