-- On Tuesday, the US dollar fell to its lowest level since May 1981 against the British Pound and an all time low versus the Euro dollar. The following day, the dollar rebounded, posting the best one day rally the greenback has experienced in months. The higher close following the 26 year low seen Tuesday, hints loudly that an important low for the dollar has or is in the process of been carved out.
Historically, the dollar and commodities tend to move opposite each other. Consequently, it is wise to watch carefully the ups and downs of the dollar as it tends to have an important impact on the hard asset markets and the value of individual commodities. As the dollar goes, commodities move opposite.
The last major high point for the dollar was in the early weeks of '07 when it hit the 85.50 level, rolled over and began to leak badly. On the break, the news became dollar bearish with the Fed refusing to hike rates and economy showing signs of weakness. More recently, the sub prime real estate crisis surfaced, adding downward pressure. Since January, '07 the dollar has been locked in a definite bear trend.
The CRB index, the most widely followed gauge of commodities experienced its last major low in early January of '07, when it fell to the 375 level, turned higher and accelerated sharply to the upside. On the rally, the news became bullish commodities. Sharply higher prices were seen for grains, livestock, metals and the energy markets. Since early '07, commodities have been locked in a definite bull trend.
If there was ever a year when the dollar and commodities moved perfectly opposite each other it is 2007. One market has been a mirror image of the other. The dollar did not begin to move lower until commodities began to move higher. Or, vice versa depending on ones point of view. Put whatever spin you wish on the relationship between the dollar and commodities but for 2007, the bottom line is this; the dollar and the CRB index have been moving opposite each other, perfectly.
Now comes a twist. The Dow Jones and the CRB have also been moving in near tandem. The Dow was weak in the first three months of '07 but carved out an important low in March, the same time the CRB posted its last major low. From March thru and including the past week, the dow and the CRB rallied together, perfectly.
How perfectly you ask? The Dow hit a new all time historic high nine trading days ago while the CRB hit an all time historic high seven trading days ago. They bottomed in March within days of each other and peaked within days of each other as well. I said several times and I will say it again; "this year, stocks and commodities are moving in tandem. Being long one, is like being long the other."
Upsetting that scenario for the first time since the March low, was the dramatic fall the Dow experienced this week when it hit a three month low, 700 points off the all time high set only nine sessions ago. Fears of a slow down in the US housing market brought about by the sub prime real estate mess was the spark that caused the sudden meltdown. Pure and simple, investors and money managers panicked.
Fortunately, there was no panic selling by those bullish the CRB as the index held up relatively well and remains within striking distance of a new all time high. One has to wonder, however, if the CRB can ignore for long what is unfolding with the Dow and other equity markets. After all, stocks and commodities have been moving in tandem since March and only this week has a serious divorce taken place between the two markets. Will the divorce continue? Or, will they once more move into sync?
I do not view the drop this week in the Dow as the week's big story but the media certainly did. What the media overlooked and I focused upon was the sudden rise in the value of the US dollar the day after it hit a new 26 year low. If the dollar continues higher over the near term, there is no doubt in my mind that the CRB and many individual commodity markets are going to leak badly. If so, that means the CRB index may begin to hemmorage similar to the Dow Jones.
If the dollar does indeed have the legs for a further run-up in value, don't be surprised to see the Dow Jones and the CRB grinding lower. Stocks and commodities rallied in unison most of this year and they may decline together as well. And the US dollar may actually improve quite a bit at the very same time.
Call me at 406-682-5010 if I can be of help.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)