EURO CLIMBS TO TWO -YEAR HIGH -- THAT'S GOOD FOR EUROZONE ETFS -- GERMAN ISHARES NEAR BULLISH BREAKOUT -- WEAK DOLLAR BOOSTS EMERGING MARKETS
EURO RALLIES TO TWO-YEAR HIGH... Yesterday's message showed the euro testing its March high. Chart 2 shows the eurozone currency trading above that level in today's trading. That puts the euro at the highest level in nearly two years. The rising euro is putting more downside pressure on the U.S. Dollar Index which is nearing a test of its March low. Yesterday's message wrote about the weaker dollar boosting commodity prices, and precious metals in particular. Another side effect of a weaker dollar is that it encourages investment in foreign markets with stronger currencies. And the eurozone in particular that uses the euro. The weekly bars in Chart 2 show that the new uptrend in the euro has taken place after a successful test of its late 2016/early 2017 low. That potential "double bottom" increases the odds that the euro rally has more staying power. That should attract new money into that region. The euro is also benefiting from the $2 trillion stimulus package passed by the European Union to boost the economies of that region. A strong euro is especially good for eurozone ETFs that are priced in a weaker dollar.


RISING EURO BOOSTS EUROZONE ETFS... While eurozone stocks are experiencing some minor profit-taking today, its stock ETFs are higher. That difference is tied to the stronger euro. That's because foreign stock ETFs are priced in weaker U.S. dollars. That means their stock ETFs do better than their local benchmarks when their currency is stronger than the dollar. The daily bars in the lower box in Chart 3 show the MSCI Eurozone iShares (EZU) touching the highest level since February. And doing better than stocks here in the states. That can be seen in middle box which plots a ratio of the EZU divided by the S&P 500. The ratio bottomed in March, and started rising again during the middle of May. The ratio is now trading at the highest level since March. That's because of the rising euro which is plotted in the upper box. The two upper boxes show a close correlation between the EZU/SPX ratio and the currency. The ratio bottomed with the euro during March and May (see circles); and has risen with the currency since then. Another good sign is coming from an even stronger performance in Germany.

GERMANY ISHARES NEAR UPSIDE BREAKOUT... Germany is the biggest economy in Europe. So what happens there matters to the entire continent. The weekly bars in Chart 4 show Germany iShares (EWG) moving closer to a challenge of their January peak. A close above that level would constitute a bullish breakout for German stocks; and would give an additional boost to the entire region. Germany is the second biggest part of the EZU (29%) and is second only the France's EZU weight of 33%. A stronger eurozone would also be a plus for the global economy.

WEAKER DOLLAR BOOSTS EMERGING MARKETS... The bullish effect of a weaker dollar applies to all foreign markets, including emerging markets. The rising red line in Chart 5 plots a ratio of Emerging Markets iShares (EEM) divided by the S&P 500 showing EM outpacing the SPX over the last couple of months. That has a lot to do with the rising green line which plots the WisdomTree Emerging Currency Fund (CEW). There again, rising local currencies (versus the dollar) gave an added boost to EM stocks, especially in Asia.
GLOBAL IMPACT OF RISING COMMODITIES... Since a weaker dollar boosts commodity prices, foreign stocks tied to commodities benefit as well. That includes commodity exporters like Australia and Canada whose currencies have also been rising (and EM commodity exporters like Brazil and Russia). A stronger Chinese yuan has also given a boost to commodity prices by making Chinese imports of those commodities more affordable. China is the world's biggest buyer of commodities. A stronger Chinese yuan is also attracting funds into Chinese stocks, which is helping boost Asian markets in South Korea and Taiwan whose stock ETFs have also been rising.
