WEAKER DOLLAR PUSHES COMMODITY PRICES HIGHER -- GOLD AND ITS MINERS CLIMB -- RISING ALUMINUM AND COPPER PRICES PUSH THEIR SHARES TO NEW HIGHS -- SOUTHERN COPPER HITS ALL-TIME HIGH -- RISING COMMODITIES MAY GIVE A BOOST TO CANADIAN STOCKS
U.S. DOLLAR INDEX WEAKENS ... The U.S. dollar continues to weaken. Chart 1 shows the PowerShares US Dollar Index (UUP) falling today to the lowest level in a month. The dollar is down against all foreign developed currencies except the yen which is marginally lower. The biggest influence on a falling dollar usually comes from a rising euro. That's because the euro has the biggest weight in the UUP (57%). Chart 2 shows the euro rising to the highest level of the month after recently finding support near its 50-day average. Two of the day's biggest currency gainers are the Aussie and Canadian dollars, which are viewed as commodity currencies. That makes sense considering that a falling dollar is giving a big boost to commodity prices. That also explains why a lot of money is moving into stocks tied to commodities, mainly in energy and metals. Which includes Canada.
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Chart 1
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Chart 2
FALLING DOLLAR IS BOOSTING COMMODITIES ... Commodity prices usually rise when the dollar falls. And that's what they're doing. The daily bars in Chart 3 show the Bloomberg Commodity Index ($BCOM) rising to the highest level since November, and trading back above its moving average lines. That rally is being driven mainly by energy and metal prices. Aluminum and copper prices are rising to the highest level in at least three years, while the price of crude oil has touched $60 a barrel for the first time in more than two years. Cold weather is also giving a big boost to heating oil and natural gas prices. Precious metals, which usually benefit from a weak dollar, are also rallying. Chart 4 shows the Gold SPDR (GLD) climbing back above its moving average lines for the first time this month. Chart 5 shows the VanEck Gold Miners ETF (GDX) doing the same. Stocks tied to aluminum and copper are hitting new highs for the year. Energy shares are also having a strong week.
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Chart 3
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Chart 4
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Chart 5
COPPER AND ALUMINUM STOCKS ARE HITTING NEW HIGHS... Chart 6 shows the Global X Copper Miners ETF (COPX) on the verge of reaching a new three-year high. Freeport McMoran (FCX) has already reached the highest level in two years. The monthly bars in Chart 7, however, show Southern Copper (SCCO) trading at an all-time high. A chart of aluminum shares also looks pretty impressive. The monthly bars in Chart 8 show the Dow Jones U.S. Aluminum Index ($DJUSAL) breaking out to the highest level since 2008. Alcoa (AA) is hitting a new high today. Combined with the recent upturn in energy shares, it looks like stock investors are rotating into commodity-related assets. Commodity prices usually start to rise in the latter stages of an economic recovery as inflation pressures start to build. The buying of stocks tied to commodities is also typical late-cycle behavior. One stock market that should start to benefit from rising commodities is Canada.
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Chart 6
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Chart 7
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Chart 8
WEAK COMMODITIES HAVE HELD CANADIAN SHARES BACK ... Because it's a big provider of natural resources, Canada's stock market is heavily influenced by the direction of commodity prices. The monthly bars in Chart 9 show the Toronto Composite Index ($TSX) reaching a new record high today. Not surprisingly, it's being led higher by energy and materials stocks. Canadian stocks are among the world's weakest performers this year. The red line in Chart 9 is a relative strength ratio of the TSX divided by the FTSE All-World index. And it shows very weak relative performance. [The TSX gained 6% this year versus a 24% gain in the FAW]. Weak commodity prices had a lot to do with that. That's the solid area in Chart 9. It certainly appears that weak commodity prices have been a drag on Canadian stocks. An upturn in commodity prices would be a big help.
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Chart 9
RISING LOONIE BOOSTS CANADA ISHARES ... The green bars in Chart 10 show the Canadian Dollar climbing above its 50-day average for the first time in three months after finding support at its 200-day average. The loonie is also supported by rising commodity prices. That's giving a needed lift to Canada iShares (EWC). The red bars show the EWC breaking out this week to the highest level in three years. Canada iShares do better when the loonie is rising. We've been writing a lot recently about sector rotations going on within the U.S. stock market. I noted last weekend that money was starting to rotate into inflation-sensitive stocks tied to rising commodity prices. That's typical late-cycle behavior. We may need to expand that rotation analysis to include global money starting to move into foreign stocks and currencies that stand to benefit from higher commodity prices. Like Canada.
