DOLLAR INDEX DROPS TO TWO--YEAR LOW -- EURO IS TRADING OVER 120 -- WHILE CANADIAN DOLLAR HITS TWO-YEAR HIGH -- GOLD IS RISING EVEN FASTER -- GOLD SPDR MAY BE NEARING A MAJOR UPSIDE BREAKOUT -- THAT WOULDN'T BE GOOD FOR STOCKS
DOLLAR INDEX FALLS TO TWO-YEAR LOW... The weekly bars in Chart 1 show the PowerShares U.S. Dollar Index ETF (UUP) falling below its 2016 bottom to the lowest level since the start of 2015. Some of that has to do with the fact that bond yields in the states are falling faster than those in foreign markets today. Most of today's forex attention is coming from the euro which is rising to the highest level in two and half years. The ECB left rates and QE unchanged today. But the currency jumped after Mario Draghi explained in a press conference that any decisions on ECB tapering would most likely take place in October. Forex traders took that as a cue to buy the euro which has the biggest influence on the UUP (57%). The fact is, however, that the dollar is falling against all six of the foreign currencies in the UUP (and the Australian Dollar). The Canadian Dollar has jumped to the highest level in two years on yesterday's Bank of Canada rate hike. The dollar is also falling against a basket of emerging market currencies. The market getting the biggest boost from that is gold, which is actually stronger today than all of the foreign currencies.
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Chart 1
THE EURO IS TESTNG 120 BARRIER... Forex traders are keeping a close eye on the euro level of 120 against the dollar. Chart 2 shows why. The flat line shows that level marking the lows formed in 2010 and 2011. A decisive close above that barrier could add another upleg to the eurozone currency. The next major resistance barrier over 120 is the falling trending extending back to 2008. The ECB expressed some concern about the rising euro. And lowered its inflation forecast because of it. Forex traders know, however, that it's just a matter of time before the ECB announces some QE tapering. [When asked how concerned he was about the rising euro in his press conference today, Mr. Draghi commented that it was 118 on August 15. That's a quote from three weeks ago. Someone mentioned to him that it was over 120 today. Is he really that out of touch?].
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Chart 2
CANADIAN DOLLAR SURGES TO TWO-YEAR HIGH ... The day's second biggest currency gainer is the Canadian Dollar ($CDW). The black weekly bars in Chart 3 show the "loonie" surging to the highest level in two years. [That makes its 2017 gain of 10% second only to the euro's gain of 14%]. The Bank of Canada raised rates by 25 basis points yesterday to 1%, which is the second rate hike since mid-July. Not surprisingly, Canadian bond yields are holding up much better today than other developed markets. Also not surprising, the rising currency is giving a big boost to Canada iShares (EWC) which is the green line in Chart 3. That's because the EWC is quoted in weaker U.S. dollars. By contrast, the red line shows the Toronto Composite Index ($TSX) (quoted in Canadian Dollars) losing ground this year (and again today). That means that Americans invested in Canada iShares (EWC) are actually doing better than Canadians invested in their own stock market (by better than 10%).
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Chart 3
GOLD IS RISING EVEN FASTER ... I mentioned in a recent message that it wasn't enough for gold to rise when the dollar falls. It's better when gold is rising even faster than foreign currencies. And that's the case today. Chart 4 shows the Gold Trust SPDR (GLD) climbing 1% today to the highest level in a year. That's even stronger than today's gains in the euro and loonie. In fact, gold is rising faster today than all major foreign currencies, including emerging markets. That's a positive sign for the metal (and gold miners which are rising faster than the metal). And it's approaching a major test. The weekly bars in Chart 5 show the Gold SPDR (GLD) approaching a "neckline" drawn over is 2014/2016 highs. Needless to say, a decisive close above that major barrier would be a very bullish sign for the metal (and its miners). As I explained last week, part of the gold buying is coming from a weak dollar and falling Treasury yields. But part of it may also be coming from investors who are looking to hedge against an aging stock market that's looking very expensive. A major upside breakout in gold could be viewed as a loss of confidence in stocks.
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Chart 4
