Waking up this morning and discovering that the Russell 2000 had dropped some 2% and crude 4% was not exactly a pleasant experience considering that we are essentially bullish on both. Even more concerning is how oil fell at the hands of a fall in existing home sales but took no notice of the fall in initial unemployment claims (or so we have been led to believe by the press). Then we turned to look at what happened on the currency front to find that the commodity currencies did not react in a way that one would typically expect if capital was genuinely moving away from the “high yield” or “inflation” trade.
We think that the behaviour of commodities themselves is merely a “rough” result of capital flows. Accordingly monitoring the behaviour of commodities as a whole is perhaps akin to taking a pain killer for a head ache. Yes the pain will go away but a head ache is merely a symptom of an underlying cause/condition. In a similar fashion if you want to know what is likely to happen with commodity prices monitor the behaviour of capital flows that ultimately result in movements in commodity prices. The simplest way to do this is monitor the behaviour of so called commodity currencies such as the Rand, Real, Aussie and Kiwi, and Ruble against not only the USD but other developed currencies.
We have one currency that we use as a proxy for commodity currencies and that is the Aussie dollar. To get straight to the point, a strong Aussie dollar suggests a strong demand for high yield currencies and, very likely, a strong underlying demand for commodities.
Of course there is more to looking at the Aussie dollar against the USD, we prefer to look at it in ways that the average punter/trader wouldn’t. We look at the performance of the Aussie in non-USD terms using the inverse of the USD Index (the ETF UDN) as a proxy for non developed market currencies.
The “index” above has served us well over the years and continues to suggest that one should be positioning for higher commodity prices not lower over the coming weeks/months.
So we rest easy living in the land down under.
I like your way of looking at aussie vs the flip of the dollar , In the same way the pound has been trading like the anti aussie , to me gbp/aud is like the dairycrest/cisco spread I used to follow in the early 00’s it epitomizes the oldschool/newschool of the way capital is starting to flow , like dairycrest/cisco it is comming off a massive overbought position and will take years to play out …..