DOLLAR INDEX MAY BE NEARING AN UPSIDE BREAKOUT -- SEVERAL FOREIGN CURRENCIES HAVE FAILED TESTS OF 200-DAY AVERAGES -- THE EURO MAY RETEST NOVEMBER LOW -- THE RISING DOLLAR WEAKENS COMMODITY PRICES -- ESPECIALLY BASE METALS AND ENERGY
DOLLAR INDEX NEARS NEW HIGH... The recent upturn in the dollar is continuing today. The daily bars in Chart 1 show the Invesco U.S. Dollar Index Fund (UUP) jumping to the highest level in two months and nearing a challenge of its December high. A close above that chart barrier would put the UUP at the highest level in nearly two years. That's most likely due to the fact that the U.S. economy is still the strongest in the world. Recent signs of economic weakness in Europe and Asia are also weighing on their respective currencies which are losing ground against the dollar. Interestingly, at a time when U.S. stock indexes are testing their 200-day moving averages, several foreign currencies have met resistance at their red lines. Like the three shown below.
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Chart 1
200-DAY AVERAGES CAP FOREIGN CURRENCIES ... Chart 2 shows the Australian Dollar ($XAD) failing a test of its red line at the end of December, and falling today to the lowest level in more than a month. The Aussie is closely tied to trends in China and is also heavily influenced by the direction of base metals which remain weak (more on that shortly). Chart 3 shows the Canadian Dollar ($CDW) also failing a test of its 200-day line in late December. The loonie is now threatening its 50-day average (blue line). The Canadian currency is also being hurt by weaker commodity prices, and oil in particular. Chart 4 shows the British Pound ($XBP) falling back below its 200-day average near the start of January. Sterling is being undercut by problems with Brexit and lower expectation for economic growth in the U.K. The euro is also being hurt by lower growth expectations in the eurozone.
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Chart 2
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Chart 3
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Chart 4
EURO IS RETESTING ITS NOVEMBER LOW -- YEN HOLDS UP BETTER... The euro is even weaker than the three just shown. Chart 5 shows the euro ($XEU) undercutting its January low today and nearing a test of its low formed last November. A close below that previous low would put the common currency at the lowest level since the middle of 2017. That would be good for the U.S. Dollar index because the euro carries the biggest influence on UUP direction (57%). That makes a falling euro especially bullish for the U.S. dollar. While that's good for the dollar, however, it's not necessarily good for the rest of the world because it implies weakness in foreign markets. The Japanese yen has held up much better than other major currencies. But it too is starting to weaken. Chart 6 shows the Japanese yen ($XJY) falling to the lowest level since December. The Japanese yen is the only major developed foreign currency to remain above its 200-day average. But that potential support line may be retested shortly.
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Chart 5
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Chart 6
RISING DOLLAR PUSHES COMMODITY PRICES LOWER ... One of the most direct intermarket effects of a rising dollar is falling commodity prices. That's because commodities are priced in dollars. Chart 7 shows the Bloomberg Commodity Index in a major downtrend. Interestingly, its October rally attempt also failed at its 200-day moving average; and it remains well below that red line. Chart 7 shows the BCOM now trading back below its 50-day average (blue line) which suggests further weakness. That's a direct effect of the recent upturn in the greenback. All commodity groups are being hurt today. Base metals are the weakest. Chart 8 shows the Invesco DB Base Metals Fund (DBB) dropping sharply over the past two days. The DBB includes prices of aluminum, copper, and zinc. It too failed an early January test of its red 200-day line. Base metals are considered to be one of the most economically-sensitive commodity groups; and their direction can tell us something about the strength (or weakness) of the global economy.
The black bars in Chart 9 show the Invesco DB Energy Fund (DBE) in a very weak trend since last October. The green line shows the negative impact that the rising dollar has had on falling energy prices over those four months. That also explains why energy shares have been doing so badly of late. As have stocks tied to basic materials. Gold has held up much better than other commodities, along with its mining shares. Precious metals have been the only commodity group to gain ground over the last four months (+8%). Chart 10 shows the Gold Shares SPDR (GLD) rising to the highest level in eight months. The new appetite for gold and its miners that started during the fourth quarter is most likely the result of investors seeking an alternative to weaker global stocks. An upside breakout in the dollar, however, might be enough to slow the recent move into precious metals. Historically, it's usually been a sign of investor caution when the price of gold is doing better than more economically-sensitive commodities like copper and oil. Investors also sometimes buy gold as a hedge against the value of their falling currencies. That currently applies to those outside the U.S.
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Chart 7
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Chart 8
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Chart 9
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Chart 10
STOCK INDEXES CONTINUE TO TEST 200-DAY AVERAGES ... Major U.S. stock indexes continue to struggle with potential overhead resistance at their 200-day moving averages. The daily bars in Chart 11 show the Dow Industrials trying to stay above their red line at 25009. So far, the Dow has been the only major stock index to cross over that line. But it's struggling to hold that upside breakout. Chart 12 shows the S&P 500 backing off from its red line last week. Despite a higher open today, the SPX remains below that major resistance line. A stronger dollar may be playing a role there as well. A rising dollar can be a depressant on large multinational U.S. stocks because it makes their exports more expensive. And most of those big stocks reside in the S&P 500 Index.
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Chart 11
