The US dollar has been continuing to vault higher in the last few weeks, with strength broadening impressively versus all other major currencies.

According to StockCharts.com’s John Murphy, the US Dollar appears to be forming a major bottom, which is a very bad news for commodities (as US Dollar and commodities trend is opposite directions).

Here is his note (highlighted comment is ours):

“The monthly bars in Chart 2 plot the trend of the U.S. Dollar Index since 2000. [The USD measures the dollar against six foreign currencies]. The USD peaked in 2002 (bottom for commodities) and fell sharply for the next six years before bottoming during 2008. Since then, it has traded sideways in what appears to be a major bottoming formation. The last monthly bar to the right shows the USD moving up to challenge its 2013 high near 85, and a resistance line drawn over its 2010/2013 highs. A close above its 2013 high (which appears likely) would increase the odds for a new dollar uptrend. Those odds are strengthened by divergent policies between global central bankers — especially in the eurozone and Japan. Both of those regions are in the middle of — or just embarking — on aggressive monetary stimulus to boost their economies. At the same time, the Fed is ending its bond buying program (QE3) during October, and expectations are building that the Fed may be more aggressive in raising short-term rates next year. There are a number of intermarket implications that would likely result from a stronger dollar.

Rising Dollar is Bearish for Commodities…

One of the most conistent intermarket principles is that the dollar and commodities trend in opposite directions. Chart 3 makes that clear by comparing the trend of the U.S. Dollar Index (green bars) to the CRB Index of nineteen commodities (solid area) since 2000. Two major turning points are seen on the chart. The first is that the major upturn in commodities started in 2002 just as the USD was starting a major descent (see arrows). The second major turning point came in mid-2008 when a major peak in commodities coincided with a dollar bottom. 2008 marked the highpoint for commodities, and the lowpoint for the dollar. The two down arrows in 2011 and this year show downturns in the CRB Index coinciding with coincident upturns in the USD (green up arrows). The Correlation Coefficient between the two markets has been negative throughout the entire period, with a current negative correlation of -.72. One of the positive side-effects of lower commodities is that it reduces inflation expectations, which reduces the need for the Fed to tighten monetary policy too fast, and also reduces upward pressure on bond yields. All of those factors are positive for stocks — and U.S. stock in particular.”

In other words, Brazil’s Bovespa (extremely correlated to commodities – see chart below) might already have seen its secular peak in 2008 (like commodities)…  that’s it, if the “Secular Dollar Bull” theory is confirmed.

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