Commodity Based Currencies: Long Term Prospects Are Bright

Aug. 6.09 | About: Materials Select (XLB)

The Canadian dollar, also known as the loonie or the Canuck buck (as I like to call it), has been making new price highs recently along with the Australian dollar. One big reason is because those currencies along with their country’s economies are tied to commodities—metals, gas, oil—and because of this, US investors are using these currencies as a type of inflation hedge. This is not a bad move considering that many economists feel that massive inflation will be the ultimate result of the quantitative easing by the Fed and other central banks, and inflation means higher commodity prices.

The question is when this inflation will kick in. The general consensus seems to be not until 2010 at the earliest. So is now a good time to pile into these currencies and hard commodities?

Below are the weekly charts (click to enlarge) of the Loonie (FXC), Aussie Dollar (FXA), and the Materials SPDR (NYSEARCA:XLB). You can see that their price movements are quite highly correlated, especially between the XLB and the FXC. All of these ETFs have enjoyed sizable gains since their March lows, and it’s hardly unreasonable to expect them to run out of steam in the near future.

Resistance levels have just been broken
But that’s not what the weekly charts are telling us. Each of these ETFs have broken significant resistance levels in just the past several days and it appears that the next stop is higher: $97 (+5%) for the FXC and $35 (+17%) for the XLB. The Aussie dollar is nearing minor resistance at $85-$86 and it needs to clear that before it can continue its upward jaunt to the mid-$90s.

Future prospects for commodity-based currencies
Long-term prospects for these currencies is excellent because at some point, economies will recover and the need for raw materials, especially in the emerging markets, will explode. But that doesn’t mean that there won’t be any pullbacks before that. A rise in both currencies will make their goods more expensive (especially for us gringos whose buck sucks) thus hampering exports. A pull-back in either currency to one of the support levels shown on the charts would signal a buying opportunity. Forex players may want to keep this scenario in mind, and for you stock players, the percentage play is the XLB over the FXA or the FXC.

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