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Looking at the
action in the commodity currencies (particularly those of Australia and
Canada), the drubbing they're taking today (Tuesday, 10/5/05) makes some sense,
but only if you're looking at things a certain way.
Truth is, it's a
really complex environment right now. Aside from the arrogant few who
constantly spout the same tired dogma, a lot of very smart analysts are
perplexed by the way commodities, currencies and other asset classes have
recently been trading in relation to one another. Meanwhile, nobody has
gotten this year exactly right. While I can pat myself on the back for doing
an about-face on the U.S. Dollar almost on its bottom tick last December,
even as a precious metals bull I didn't also make the call that gold would
rally so strongly despite a rising Greenback. And while others have been
quite right about commodities and commodities-related markets, those types
didn't envision the drubbing the Euro, Yen and Pound have taken this year.
Assets just
aren't trading in the groupings we had all gotten used to from 2002 through
2004.
Things do add up
a little better, though, if you believe the global economy is still U.S.
centric (or U.S.consumer-centric), perhaps now more than ever. As I
suggested in a brief article on September 14th, I believe the action of
global stock markets over the last few years supports such a hypothesis.
Perhaps the
biggest surprises in 2005 thus far have been these:
- The
resiliency of the American economy and
- The resolve
of the Federal Reserve in tightening interest rates
Now, one could
certainly complain about the imbalanced nature of our inflation-induced
growth, but that story rings true worldwide and we have seen a faster pace of
growth than most industrialized nations nonetheless. And one could point out
that the Fed is behind the inflation curve, which it surely is (and might be
purposeful on its part, for now), but it has already boosted rates above the
point at which many thought our debt-dependent economy would crumble.
However, the two
items above are indeed surprises, ones that perhaps help explain the bipolar,
range-bound stock market action of 2005: when economic data surprises to the
upside, we see trading outcomes that seem to anticipate continued economic
strength, when the numbers are weaker than expected, we see the opposite.
Even more
specifically, the market seems to waffle back and forth on the question: will
the Fed be able to keep tightening, or won't it?
When economic
numbers are strong, we see generally stronger stocks, stronger commodities
(presumably on the notion that manufacturing-led economies, particularly
those of Asia, will keep consuming raw materials to supply our consumption
habits), weakness in non-commodity foreign currencies (Euro, Pound, Yen) on
the idea that the Fed will further strength the Dollar by continuing to
tighten (I'm aware that one prominent foreign currency "analyst" -
I put that word in quotes because I suspect he's a trader masquerading as
analyst - has been writing, despite the overwhelming evidence in 2005, that
interest rates don't matter in determining a currency's value against others.
This is simply wrong, period. In fact, I'm truly astonished every time I see
him write it; such comments suggest an astounding misunderstanding of the
depth of today's currency markets, particularly the Euro, and the complexity
of derivatives markets. The combination allows for cross-currency "carry
trades," with the trade de jour being borrowing Euros short to lend US
Dollars long, a situation that is inherently Dollar positive) and stronger
markets stock markets worldwide. What's most interesting about this is that
we have generally seen strength in the commodity currencies this year despite
U.S. Dollar strength, which I can only conclude also stems from the
notion that the U.S. consumer will continue to put upward price pressure on
commodities via the world's manufacturing economies ( China, et al).
When economic
numbers disappoint, on the other hand, we get weaker U.S. stocks, a weaker
U.S. Dollar (based on the idea the Fed will not only stop tightening, but
revert to cutting interest rates), a stronger Euro-Pound-Yen as non-commodity
Greenback alternatives, softness in foreign stock markets and commodity price
pauses. If sustained economic weakness does materialize, then a significant
commodity correction should be the result (I am one who's quite bullish on
the long-term commodity story, by the way); such an outcome would likely also
be seen in those "commodity currencies." In summary, we sneeze and
the world still catches the proverbial cold.
Am I crazy? Let's
watch and see. With the U.S. Dollar again in overbought territory and facing
technical resistance, gold solidly overbought on a short-term basis (it still
trades more like a commodity than a currency), oil threatening to break down
from a visible head-and-shoulders top pattern and the U.S. stock market in
poor technical condition (in-depth Point and Figure analysis shows the
picture to be more worrisome than some might realize… read any of Bruce
Zaro's commentaries for expert commentary on the subject), market action is
poised to follow-through on today's disappointing ISM services data in a downward
direction. If these indicators are indeed poised to turn down in a stronger
way than we've seen for awhile, perhaps our range-bound market is going to
fret once again about recession (a reasonable concern many market watchers
fear, yet over the last 18 months every bout of concern has been quickly
replaced by a bout of optimism and vice-versa). Thus, the commodity
currencies should also stand to correct as the markets worry about the
much-anticipated end of the American consumer and the demand he places on the
world's natural resources.
It seems to boil
down to whether you think the U.S. economy can continue to grow or not;
perhaps yet again we'll soon see offsetting data that suggests the economy
isn't yet sunk that will once again raise investors' spirits and rally stocks
back up within this trading range. However, if one thinks the economy will
finally weaken, then in the name of simple prudent portfolio management a
person should probably be looking to protect at least some profits in those
commodity-related investments and commodity currencies.
In short: it just
doesn't yet make sense to be a bear on the U.S. economy and a bull on
commodities.
Chip
Hanlon
President, Delta Global Advisors, Inc.
19051 Goldenwest,
#106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
A widely-followed
market commentator, Mr. Hanlon served as the C.O.O at Euro Pacific Capital
prior to taking the reigns at Delta Global. He had previously been the
President of Unfunds, Inc. and spent 7 years prior with Sutro & Company
as a Vice President and the company's Los Angeles Director of Syndicate
Offerings.
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