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At one point in Monday’s 6/14 trading session, CurrencyShares Euro Trust (NYSEARCA:FXE) moved 1.7% higher for the day and 3.2% off its 4-year low. Risk assets from stocks to commodities to high yield bonds celebrated the euro’s apparent ability to rally on evidence of manufacturing strength in the European region.

Half-way through the day, however, Moody’s decided to downgrade Greek debt to junk status. That was enough for FXE to pull back to its lows for the trading day, albeit a 1% gain. It was also enough to hamper U.S. stock progress, as major indexes turned mixed.

Still, commodities had one of their best sessions in months. The stronger the euro… the weaker the U.S. dollar; the weaker the U.S dollar, the higher commodity prices typically move as commodities are priced in dollars. Factor in European manufacturer demand… and you get a strong tailwind supporting the entire basket of commodities.

On 6/14, the top 5 non-leveraged ETFs happened to relate to hard assets:

Euro Dollar Gains Help Commodity ETFs
% Gain on 6/14/10
United States Natural Gas (NYSEARCA:UNG) 4.6%
iPath DJ AIG Nickel (NYSEARCA:JJN) 2.6%
iPath DJ AIG Industrial Metals (NYSEARCA:JJM) 2.2%
First Trust Water (NYSEARCA:FIW) 2.0%
iPath DJ AIG Agriculture (NYSEARCA:JJA) 1.7%

In complete contrast, the same cannot be said for basic materials companies. Even though these are the same companies that often produce/find/store/transport the commodities that the world demands, ETFs in agribusiness and basic materials were some of the least coveted on 6/14/10.

Euro Dollar Closing Near Its Lows Crushes Materials ETFs
% Gain on 6/14/10
SPDR Basic Materials (NYSEARCA:XLB) -0.98%
Vanguard Materials (NYSEARCA:VAW) -0.83%
Market Vectors Agribusiness (NYSEARCA:MOO) -0.65%
iShares DJ Basic Materials (NYSEARCA:IYM) -0.60%
S&P 500 -0.18%

Energy stocks were also hammered. However, uncertainty about BP’s future had a little something to do with energy ETF performance.

If one examines the 3-year correlation between Euro Trust (FXE) and SPDR Select Basic Materials (XLB), he/she will recognize that the relationship is unusually high for different asset types; the correlation is 0.72. The only relationship higher is the one for Select Energy (NYSEARCA:XLE) at 0.75. (Three-year correlations between FXE and Consumer Discretionary, Financials, or Health Care came in much lower at 0.38, 0.39 and 0.40 respectively.)

It would seem that, based on correlation data as well as commodity data, materials/agricultural companies should have rallied on the 1% gain for the Euro Trust (FXE). Yet, perhaps, the currency’s slide from 1.7% down to a 1% gain by day’s end set the tone for stock assets… and Materials ETFs in particular.

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above.The company receives advertising compensation at the ETF Expert web site from Invesco PowerShares Capital Management, LLC and Geary Advisors, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

Source: Euro-Dollar Stability Boosts Commodity ETFs