TREASURY SECRETARY TALKS DOWN THE DOLLAR WHICH DROPS SHARPLY -- BRITISH POUND SURGES AGAINST THE DOLLAR -- WHILE BRITISH BOND YIELD RISES TO HIGHEST LEVEL IN A YEAR -- BIG DROP IN DOLLAR PUSHES BLOOMBERG COMMODITY INDEX NEAR A TWO-YEAR HIGH
BRITISH POUND RISES WITH UK BOND YIELDS ... It's now official that the U.S. government wants a weaker dollar. Speaking in Switzerland, Treasury Secretary Mnuchin stated that a weak dollar is good for the U.S. economy, and would help reduce the U.S. trade deficit. That's because a weak dollar makes U.S. exports cheaper for foreign buyers. [And why I stated yesterday that a weaker dollar favored large cap multinationals]. Not surprisingly, the dollar reacted badly by falling 1% today to another three-year low against major foreign currencies. The two biggest gainers were the yen and British pound with gains of more than 1%. Let's take a closer look at Britain. The red bars in Chart 1 show the British pound surging 1.5% to 1.42 which is its highest level since the Brexit vote in June 2016. That big gain was supported by a big jump in British bond yields (green line). The green arrow in Chart 1 shows the British ten-year bond yield surging 6 basis points to 1.41% which puts the bond yield at the highest level since the start of 2017. That's even bigger than the 4 basis point jump in Treasury yields earlier today. Meanwhile, Canadian bond yields are up 4 basis points today, while Germany's yield is climbing 3 bps. Those worldwide gains support the idea that global bond yields are headed higher. Higher bond yields are being supported by strong economic growth and signs of rising commodity inflation.
(click to view a live version of this chart)
Chart 1
BLOOMBERG COMMODITY INDEX NEARS TWO-YEAR HIGH ... Today's big drop in the dollar is being matched by big gains in commodity prices. The weekly bars in Chart 1 show the Bloomberg Commodity Index rising well above its early 2017 peak and trading just shy of its mid-2016 intra-day peak at 90.31. An upside breakout seems likely. The BCOM has already exceeded a resistance line drawn over its 2016/2017 peaks. Commodity gains are widespread today. A 2% gain has pushed WTIC crude oil over $65 for the first time in three years, while Brent crude is back over $70. Industrial metals are stronger with the price of copper rising by 3%. Gold and other precious metals are also having an especially strong day. Silver is up 3%. Agriculturals are also higher.
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Chart 2
GOLD SPDR SURGES TO FOUR-MONTH HIGH ... The weekly bars in Chart 3 show the Gold SPDR (GLD) climbing the equivalent of $20 today and in the process of testing its September intra-day high at 128.32. A close above that chart barrier (which appears likely) would set the stage for a more important test of its mid-2016 peak near 131. The falling trendline is part of the four-year "neckline" that I showed in yesterday's message. A decisive close above that line would be another big positive for gold prices which appear to be emerging from a four-year bottoming formation. A major upside breakout in gold would boost the entire commodity asset class and a case for higher inflation. All of that is bullish for gold mining stocks.
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Chart 3
GOLD MINERS ETF MAY BE NEARING UPSIDE BREAKOUT AS WELL ... The weekly bars in Chart 4 show the VanEck Vectors Gold Miners ETF (GDX) rising to the highest level in four months and also in position to achieve an upside breakout of its own. That would occur with a decisive close above the flat resistance line drawn over its 2017 peaks. It's also worth noting that this week's 3.6% gain in the GDX is twice as much as the week's 1.6% gain in GLD. That's noteworthy because gold miners (GDX) usually rise faster than the commodity (GLD) when gold prices are rising. And both have done slightly better than the S&P 500 since mid-December. The falling dollar has a lot to do with rising gold prices and stronger commodity prices in general. And, as you know, rising commodity prices are inflationary which supports the case for higher global bond yields.
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Chart 4
NEWMONT MINING IS ALREADY HEADED HIGHER... The weekly bars in Chart 5 show Newmont Mining (NEM) already trading at the highest level in fifteen months. And its moving average lines are bullish (10 week over the 40 week). Its relative strength ratio (solid line) is also starting to rise versus the S&P 500 for the first time in six months. Newmont is the day's strongest percentage gainer in the materials sector. It's also a leader among gold miners. [Note: Today's surge in gold may be causing some nervous profit-taking in an overbought stock market. That's especially true of smaller stocks which are more vulnerable to a falling dollar. Weak airline stocks are weighing heavily on the transports, while weak semiconductors are weighing on the technology sector].
