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Chart Presentation: Currencies and Commodities

Inter-Market Relationships Analysis
Kevin Klombies
March 4th, 2005

As crude oil prices drove through 55 yesterday we couldn’t help but be reminded of the other great Tom Hanks line from the movie, “A League of Their Own”. To paraphrase... there’s no crying in trading. Strangely enough we actually had to the sense yesterday that crude oil had given the markets its best shot and... not much had happened as a result. As oil moved up to last October’s highs the airlines, instead of death spiraling into the ground, began to firm. Stocks like Wal Mart (WMT) that tend to trade inversely to crude oil were higher on the session and the S&P 500 Index didn’t seem to be at imminent risk of breaking below the support line at 1192.

Over the past few months the currency markets have started the slow process of marking a commodity price top. Since major tops and bottoms in currencies tend to take months to form it is rather important that the U.S. dollar continues to resolve higher from current levels. To start things off we show a comparative chart of the Canadian dollar futures, Australian dollar futures, and crude oil futures.

The first thing to notice is that all three trend broadly together. Not every day and certainly not tick for tick but, overall, a rising Cdn and Aussie dollar will tend to go with a positive trend for energy prices. So... there we were watching as the U.S. Dollar Index (DXY) futures moved slowly up towards 83.50. When the DXY broke down from 83.50 recently (see page 3) crude oil prices climbed up from around 48.50. The Canadian dollar futures have a good support line at .8000 and the low early in the day was .8002.

The Swiss franc and euro were lower and we have shown that these currencies tend to peak out several months ahead of the major commodity indices. The chart at right shows that the Swiss franc started to ‘top’ at the start of 2004 and that it took 3 more months before the CRB Index turned lower.

Our point is that short of a near-term collapse in the U.S. dollar the currency markets still support the argument that commodity prices are making some sort of major cycle top. With the bond market at support and the yield spread hard into the moving average line (page 6) as the Nikkei rises squeezing Japanese yields upward... the dollar has a chance to push nicely up through 83.50 if the employment report this morning is negative for bonds.

Kevin Klombies Editor/Publisher

IMRA
Inter-Market Relationships Analysis
Email: krk@krk-imra.com

All Rights Reserved, 2005.

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