Quick Commodity Currency Primer
Although the Chinese would like to change it, the global standard of payment for commodities is the US Dollar (USD). Thus a strengthening USD is a headwind for commodity producing exporters and for commodity prices. During times of Bullish commodity runs, you'd typically see increasing prices of commodities coupled with strengthening Commodity Currencies and a weakening Dollar. Another way to say it would be that when commodities are strong, the local currencies of the export country usually rise.
Commodity Currencies I Track
Although I do not often trade currencies directly, I keep a very close eye on them. They are an important component "under the hood".
Global Reflation - Is it happening?
In early 2016 the CRB Index which measures a basket of commodities ( Oil / Grains / NatGas Industrial Metals etc ) absolutely cratered and took out a level of support going back to 1970. The world was ending. Coming out of that, the Global Synchronized Growth and Reflation Trade narrative, you'd think we would have gotten a helluva bounce. Well, what does the CRB chart say.... refer to the chart below.
Well, we got a bounce, but a pretty small one. Not saying if you bought oil at $30 you didn't kill it, just saying this does not look like a global ramp in commodity demand to me. To my eye, the chart looks to be rolling over.
Are the Commodity Currencies supportive of higher Commodity Prices?
Canadian Dollar ( $XDC )
On the chart below I've over-layed oil ( brown) on top of the Canadian Dollar ( Black ). For the Dollar, RSI has been falling for 9 mo as has momentum shown on the PPO. Price has just dropped below a key support level. Doesn't look too bullish to me.
Looking back over the chart, notice how well oil tracked with the Canadian Dollar. Today, look at the big divergence. What happens next? Does Oil catch down or the $XDC catch up?
Australian Dollar and Emerging Market Currency Basket
For the sake of brevity I'll combine my comments on these. As you can see, they both tell the same story; Broken trend lines, fresh lows, falling RSI and waning momentum.
A Quick look at the US Dollar ($USD)
The USD has made a quick move from 88.50 to 95 over the past 2 months and is back-testing key resistance. As you'd expect, RSI is rising. Momentum has gone positive. Watch this spot closely. If the USD convincingly takes out 95, I'd expect further weakness in the commodity currencies, oil, and gold. If 95 holds then for the intermediate term, expect a trading range.
On a prior post, I told you I shorted $EEM. Although I am far from a global macro trader, that position is related to this post. Can the Commodity Currencies hold the line here, reverse, and head higher? Absolutely! If that happens, I will likely be stopped out on the EEM trade.
Could traders fade the pop in Oil from Friday along with the USD taking out 95? Absolutely.
Will that happen? I have no idea! What I can tell you with absolute certainty is that we are at a critical juncture for the USD, EEM, and commodities. Stay Tuned!!
The $USD has been consolidating for nearly 2 years after having had an epic run from June 2014 - March 2015. Since then it has been range bound between 100.50 and 92. The Dollar is now breaking out and has an open runway to move higher. Trader's can view 100.5 to 100.70 as a support zone. You can see this clearly on the weekly chart shown below. If any $USD weakness were to result in a pull back into this area, interested traders could use the opportunity to get long with a tight stop. Unless and until the $USD has a weekly close below 100.50 the bulls remain in control.
While this is not a prediction by any means, and may be viewed by some as an absurd notion, there is not a lot of technical resistance between the current position of the $USD and the 120 level where it topped in 2002. You can see this on the long term monthly chart shown below. Viewed in those terms, building a long position in the Dollar on dips would be a smart move. Again, with 100.5 as a stop, the minimal downside risk vs potential upside reward is substantial.
The rising bond yields, an impending FOMC rate hike priced in at nearly 100% and optimism regarding fiscal stimulus via an infrastructure package in early 2017 are supportive of dollar strength. The YEN and EURO remain tepid against the dollar. In just 3 weeks the $USD has appreciated 6% against the YEN and 4% against the EURO. As long as the FOMC talk remains hawkish and expectations for a stimulus package remain in place, pull backs in the Dollar should remain shallow and short lived.