FALLING DOLLAR PUSHES BLOOMBERG COMMODITY INDEX TO ELEVEN MONTH HIGH -- GOLD NEARS ANOTHER FOUR-MONTH HIGH -- A WEAK DOLLAR ALSO FAVORS LARGE CAPS OVER SMALLER STOCKS -- S&P BIOTECH SPDR REACHES NEW RECORD
DOLLAR CONTINUES TO WEAKEN AS FOREIGN CURRENCIES RISE... Chart 1 shows the PowerShares Dollar Index (UUP) falling today to the lowest level in three years. The dollar is losing ground against virtually all major foreign currencies. Most of the upward movement in the UUP is coming from buying of the the euro, pound, and yen. Chart 2 shows the euro rising to another three-year high against the dollar, while Chart 3 shows the British pound trading at a nineteen-month high. Even the yen is starting to rise. Chart 4 shows the Japanese yen trading at the highest level in four months. Chart 5 shows the Canadian Dollar also gaining ground. Most of those gains are tied to expectations for a more aggressive monetary policy by foreign central bankers and signs of accelerating growth in foreign developed and emerging economies. The dollar is also falling against emerging market currencies, including the Chinese yuan and Mexican Peso. As explained in previous messages, the weaker dollar is reflective of global money flows into foreign stocks that are viewed as being cheaper in the U.S. When global investors buy stocks in Europe, for example, they have to also buy their local currencies. That helps explain some of the buying of foreign currencies around the world. Another side-effect of a weak dollar is rising commodity prices.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
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Chart 5
BLOOMBERG COMMODITY INDEX NEARS TEST OF OVERHEAD RESISTANCE ... When the dollar falls, commodity prices usually rise. And they are. The weekly bars in Chart 6 show the Bloomberg Commodity Index ($BCOM) trading at the highest level in eleven months and in position to challenge last January's peak. The index is already moving above a resistance line drawn over its mid-2016/early 2017 highs (see circle). A close above both of those previous peaks would constitute a bullish breakout for commodities. Crude oil is trading near a three-year high today. And the price of gold, which usually gets a boost from a weaker dollar, continues to strengthen as part of a major bottoming formation lasting four years.
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Chart 6
GOLD NEARS FOUR-MONTH HIGH ... The orange line in Chart 7 shows the Gold SPDR (GLD) nearing another four-month high. That would set the stage for GLD to challenge its early September high. The green line shows the Dollar Index (UUP) falling throughout the last year. The falling dollar since the start of 2017 has boosted gold prices. The 60-day Correlation Coefficient (below chart) shows a negative correlation of -81. That means that the two markets have been moving in opposite directions 81% of the time. The weekly bars in Chart 8 show the price of gold in the process of forming a major bottom. An upside breakout above the "neckline" extending back four years would be a very bullish sign for the yellow metal (and the commodity universe).
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Chart 7
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Chart 8
FALLING DOLLAR FAVORS LARGE CAPS OVER SMALL CAPS ... There's another side effect of a weaker dollar, which is its tendency to favor large cap stocks in the U.S over smaller stocks. That's because large multinationals derive a large part of their revenue from foreign sales. And a weaker dollar makes U.S. exports cheaper to foreigners. As a result, small caps tend to lag behind large caps when the dollar is falling. The black line in Chart 9 is a ratio of the Russell 2000 Small Cap Index divided by the S&P 500 Large Cap Index. The falling black line shows small caps lagging behind large caps since the start of last year. Notice how closely that falling line matches a similar decline in the U.S. Dollar Index (green line).
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Chart 9
S&P BIOTECH SPDR HITS RECORD HIGH ... Biotechs are on a tear. The weekly bars in Chart 10 show the S&P Biotech SPDR (XBI) rising above its 2015 peak to reach a new record. Its relative strength ratio (top of chart) is rising as well. The reason why the XBI is outperforming other biotech ETFs is that it is composed mainly of small and midsize stocks that are equally weighted. That gives greater weight to smaller biotech stocks that are being acquired by bigger pharmaceutical stocks.
