Currency/Commodity Markets We suggested that U.S. interest rates should continue to rise until currencies like the AUD began to weaken. We showed that rate sensitive price ratios (LEA/copper) are making an attempt to bottom, and also showed that rate sensitive equities (DHI) have now corrected on a year-over-year basis by an amount that is consistent with the peak for interest rates and, in most instances, the low point for the equity markets.
Below we show the AUD and the stock price of U.S. home builder Toll Brothers (TOL) with the charts offset or shifted by one year.
The idea is that if the home builders lead the economy by one year and the AUD trends with the economy... then perhaps it makes sense to look at the AUD today relative to the trend for the home builders one year ago.
The charts show that TOL began to rise in early 2000 and the AUD turned higher about a year later. The charts also show that the home builders turned negative in mid-2005 so this would be an idea time for the AUD to resolve lower with the U.S dollar resolving broadly higher.
Anyway... below we show coffee futures, lumber futures, and crude oil futures. We have included this chart with somewhat different ‘message’.
The idea is that while lumber and coffee have been trending lower as crude oil prices rise... about every three months as crude oil prices reach a peak the price of both lumber and coffee increases. Coffee futures were up more than 5% yesterday so the only commodity yet to pitch in remains lumber. The point is that lumber and coffee have been making ‘end of cycle’ rallies every few months once crude oil prices have reached a top. The argument would then be that crude oil may test the highs but should not break them.
Below we show the CRB Index and the DXY futures. When crude oil, lumber, and coffee futures made a peak in early February and May the dollar was reasonably close to a low and the CRB Index was making a peak. That seems to fit in nicely with the current situation.
Short-Term Views We mentioned some time back that if crude oil prices continued to push higher the next point to consider being negative would be when the SU/AMR ratio reached 4:1. Well... it has.
Yesterday was an odd day in many respects as energy prices pushed higher even as the equity markets ended the session stronger. Our view was that if crude oil prices were really expected to make new highs you would know it by the speed of the decline in the SPX. In a sense the argument is that the equity market’s show of indifference confirmed that oil prices are not- at present- expected to move much beyond the recent peak.
The sum of copper and crude oil goes up with bond and dollar price weakness. Copper and crude oil were higher yesterday but the dollar was reasonably firm and bond prices were actually better.
The path of the funds futures is almost identical to that of most major equity markets and the argument is that once pressure began to lesson on the short end of the yield curve the equity markets began to recover.
We point this out because the U.S. employment report on Friday has the potential to shock the bond market and any major crack in the emerging conviction that short-term yields will stop moving higher could send the equity markets rather sharply lower. We would also note that best way for short-term U.S. interest rates to fade lower is through U.S. dollar strength which is why we started off today with the Aussie dollar argument.
Disclaimer: All information on this web site is subject to change. The use of this web site constitutes acceptance
of our user agreement. All publisher financial articles at
FXtree.com are those of the individual authors and do not represent trading recommendations
of FXtree.com or its staff.
