At left we have included a comparison between crude oil futures, the ratio between the Amex Oil Index (XOI) and the S&P 500 Index (SPX), and the cross rate between the Japanese yen and Australian dollar (AUD).
At major peaks for crude oil and the energy sector (XOI) the yen is typically at a significant multi-year bottom against the Aussie dollar. The JPY/AUD cross rate bottomed in 1990 and again in 1997 and now... potentially... nine years later... it is making another bottom. The intermarket argument is that yen strength tends to go with a negative trend for energy prices and once the yen does turn higher the trend for energy prices will typically remain negative for the next two to three years.
Moving to a related topic we show the Canadian dollar futures (CAD), crude oil futures, and the ratio between short-term U.S. and Canadian debt prices below right.
The idea here is that the debt ratio bottoms as crude oil prices peak and that this goes with a cycle peak for the CAD. Put another way... in our view the CAD began to top during the third quarter of last year and if we are correct then it will break back below .8600 and resolve back into the .70’s . Since the debt ratio ‘bottoms’ and crude oil ‘tops’ take so long to build we should mention that if this is NOT the peak for the Cdn dollar then it may take another year before this set up come around once again.
We have also shown in the past that the CAD has trended with both gold and natural gas prices. Below we show the CAD along with the product of gold futures times natural gas futures.
The point here is that the rising energy and metals price trend that was serving to support the Cdn currency... stopped rising last December. The only thing missing on this chart is a break down through the support line by the CAD.
Short-Term Views I have analyzed the comparison between the TBond futures and S&P 500 Index from 1987 as well as from the current time frame. The idea is that regardless of what the markets may appear to be doing on a day-to-day basis there is still a powerful link between equities and bonds and... the falling trend for Japanese bond prices is pressuring U.S. bond prices lower which, in turn, is increasing the chances of an equity markets ‘event’ of some magnitude later this spring.
However... our sense is that it is not the U.S. equity market that offers the greatest risk (although the way brokers and dealers like Goldman Sachs are trading with commodity prices we some times wonder) but rather markets like Canada. The Cdn stock market outperforms when the Cdn dollar is rising relative to the U.S. dollar and we continue to believe that the Cdn dollar- although still rising - is at risk now.
I also analyzed the SPX from 1987 and the S&P/TSX Composite Index as well as the Canadian i-shares (EWC) from the current time period. The idea here is that the Cdn TSX is now in the process of building a ‘top’ as bond prices are pressured lower (which, by the way, is part of the relationship that links falling crude oil prices to falling bond prices) that is in too many ways similar to the pre-crash days of 1987. In a perfect world the top continues to build into mid-March followed by a sharp correction. We like the idea of being negative on the EWC with a ‘stop’ just above the recent highs near 24, a first down side target between 19 and 20, and a second target between 16 and 17 (although the seasonal cyclical trend has remained strong the past two years into early March so we could be a few weeks early here.)
The euro held support yesterday while the CRB Index remained above the 200-day e.m.a (see below left). It appears that a break to new lows by the euro along with Cdn dollar weakness and yen strength would help our thesis. We would also like to see commodities like lumber and coffee (below right) begin to strengthen relative to crude oil. Recently all three have been trending in the same direction.
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