COMMODITY CURRENCIES CONTINUE TO STRENGTHEN -- CANADIAN DOLLAR MAY BE TURNING UP -- EMERGING MARKET CURRENCIES RISE WITH STOCKS -- HONG KONG STOCKS HAVE BEEN CHINESE LEADERS -- BUT A-SHARES MAY BE BOTTOMING AS YUAN STABILIZES
CANADIAN DOLLAR STRENGTENS ... My Tuesday message wrote about the fact that stock ETFs in Canada and Mexico were looking stronger. I also mentioned their stronger currencies resulting from the rebound in crude oil and other commodity prices. With oil rebounding some more this week, commodity currencies in Australia, Canada, Mexico, New Zealand, and Norway have strengthened as well. Chart 1 shows the Aussie Dollar trading at a new four-month high. Chart 2 shows the Canadian Dollar climbing above its 50-day moving average after recently finding support at its 200-day line. The "loonie" is also challenging a falling trendline drawn over its May/June highs. That's usually a bet on higher commodity prices, and oil in particular. Strong commodity currencies also serve to boost the appeal of their stock ETFs which are quoted in U.S. dollars. Australian iShares (EWA) are already trading at the highest level in more than a year. Chart 3 shows Canada iShares (EWC) trying to clear its June intra-day peak. Part of that new strength is coming from a stronger currency and hopes for higher oil prices. That also explains why energy and material stocks have led the Toronto Stock Index higher over the past week.
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Chart 1
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Chart 2
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Chart 3
EMERGING MARKET CURRENCIES ALSO STRENGTHEN ... I've written several times about the strong performance of emerging market stocks this year. That stock rally is being supported by rising emerging market currencies. The red line in Chart 4 shows Emerging Markets iShares (EEM) trading at the highest level in a year. The green line shows the WisdomTree Emerging Currency ETF (CEW) leading the EEM higher. That adds to the appeal of emerging market stocks because investors also get the benefit of rising local currencies. A weaker U.S. dollar also supports EM assets because it keeps a bid under commodity prices. Rising commodity prices help boost EM commodity exporters. The CEW includes 14 EM currencies in Latin America, Eastern Europe, and Asia. Stronger EM currencies are also partially due to the strong move into emerging market bonds in the continuing search for yield. They offer much higher yields than most developed country bonds.
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Chart 4
HONG KONG LEADS MAINLAND HIGHER ... Money is flowing into Chinese stocks. So far, the big buying has been in Hong Kong. But Chinese stocks traded in Shanghai may be starting to turn up as well. The green line in Chart 5 shows Hong Kong iShares (EWH) trading at the highest level in a year. The red line shows the CSI 300 China A-Shares (ASHR) lagging far behind. But it too appears to be turning up. Hong Kong's stronger performance may be partially due to the fact that the Hong Kong dollar has been stronger than the Chinese yuan this year. Mainland A-Shares are quoted in yuan. But they may finally be getting some help from that currency.
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Chart 5
CHINA A-SHARES CLEAR 200-DAY LINE -- YUAN BOUNCES ... Mainland Chinese shares jumped 1.8% today which outpaced Hong Kong's gain of .83%. The red line in Chart 6 shows the CSI China A-Shares ETF (ASHR) climbing to the highest level in four months and clearing its 200-day line in the process. A close above its April high near 25 would confirm that a bottom has been formed. The ASHR may finally be getting help from its local currency. Chart 7 shows the WisdomTree Chinese Yuan ETF (CYB) showing some bounce over the last month and trading well above its January low. A stable yuan would go a long way toward attracting foreign money into Chinese A-Shares that are quoted in that currency. A stable yuan would also be good for global stocks. The two big drops in the yuan last August and year's end contributed to heavy selling of stocks around the world. The stronger yuan since then may be partially responsible for stronger global stocks over the last six months. Since China is the world's biggest importer of commodities, a more stable currency there (along with higher stock prices) would be another plus for commodity assets.
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Chart 6
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Chart 7
UNITED STATES BRENT OIL FUND TURNS UP ... The daily bars in Chart 8 plot a more encouraging picture for the United States Brent Oil Fund (BNO). The fund has climbed back above its 200-day average after retracing 50% of its January/June advance. Its 14-day RSI line (top of chart) has turned back up from oversold territory near 30; its daily MACD lines (below chart) have turned positive for the first time in three months. That helps explain recent buying of energy shares.
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Chart 8
ENERGY SHARES IMPROVE... Energy shares are usually a pretty good predicter of the direction of energy prices. And right now, energy traders appear more optimistic. Chart 9 shows the Energy Sector SPDR (XLE) ending the week back over its 50-day average. The XLE has held up better than crude which dropped 20% between June and July. The XLE/SPX relative strength ratio (gray line) has improved during August as well. Moving average trends in the XLE remains positive (50-day over 200-day average). Dollar selling during the week may also be supporting oil.
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Chart 9
OVERBOUGHT S&P 500 MAY BE DUE FOR A PULLBACK... The three major U.S. stock indexes hit record highs on Thursday. The rally since June, however, is starting to look a little tired. The daily bars in Chart 10 show the S&P 500 moving above its July peak. The 9-day RSI line, however, failed to do so and has formed a small negative divergence. [I switched to the more sensitive 9-day version of the RSI because it fits the current lack of volatility a bit better than the slower 14-day version]. Elliott Wave fans will also note that the rally since June has formed five waves which is another caution sign. A pullback to its early August low wouldn't be surprising. That would still leave the SPX well above moving average lines and its June peak.
