Commodity Based Currencies: Long Term Prospects Are Bright

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 (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.

Comments

[Mad Hedge F...:]

they sure are. The chickens are finally coming home to roost for the dollar, which has gapped since Thursday from $1.40 down to $1.4450 against the euro, and done even worse again the Australian, Canadian, and New Zealand currencies. Crude traders tell me that the weak buck is making oil go up, while currency traders inform me that it is strong crude that is causing the dollar collapse. It’s like an Agatha Christie murder mystery where all of the suspects are guilty. If we are on the eve of an economic recovery, many fear that the US will return to its old, evil, high consuming, high importing ways, and that the trade deficit will skyrocket. If is doesn’t, then you can count on burgeoning government borrowing to knock the stuffing out of the greenback. It sounds like a heads I will, tails you lose bet. This is not exactly a new trend. The chart below shows the purchasing power of the dollar since the Revolutionary War, and it has been mostly downhill since 1929. No, I have not been trading the market that long. Better to take your pay in Euros, American double Eagle gold coins, bushels of wheat, or barrels of crude.

Aug 06 11:39 AM

[je:]

When the market sell off occurs later this fall the dollar will rally. This will be a post 5th wave correction as well. When that peaks then will be the time to enter long term alternatives to the dollar.

Aug 07 08:51 AM