Note: There will not be an IMRA issue published for tomorrow. We will be on the road until Sunday but it should be business as usual next week.
All things considered yesterday was a very ‘dollar positive’ day. To explain we start off with a chart comparison between the U.S. Dollar Index (DXY) futures and the cross rate between the Japanese yen and the euro.
We have argued (rather often actually) that the base trend for the dollar is similar to that of the yen versus the euro. While we have been dollar bullish for a rather extended period of time we went ‘neutral’ on the dollar back around March because both of the relationships that we have been using for the dollar had started to weaken. The yen/euro cross rate, for example, peaked at the end of January and declined through into early June.
Below right we show the U.S. Dollar Index futures and the ratio between Amgen (AMGN) and the Baltic Freight (Dry) Index (BFI). We use the AMGN/BFI ratio and the Amgen/crude oil ratio as surrogates for the trend for the dollar.
The AMGN/BFI ratio reached a peak in early December concurrent with the initial highs for the dollar. To truly turn positive on the dollar- and actually stand some chance of being right- this ratio had to swing upwards confirmed by a return to strength by the yen against the euro.
In trading yesterday the Japanese yen and the share price of Amgen stood out as clear winners with AMGN up almost 14% and the yen higher by 2.5% against the dollar and 3% relative to the euro. From the stand point of our dollar-based relationships both ratios swung nicely to the upside.
The U.S. Dollar Index may not set the world on fire over the next few days or weeks but as long as ocean freight rates are weaker and money is moving towards biotech the dollar should look better over time. The stronger the yen against the euro the better the intermarket back drop will be for the dollar as well.
At right we show a chart of the ratio between Canada’s Bank of Montreal (BMO) and the Nasdaq Composite Index from 1997 into 2002.
We have run this chart on many occasions over the past year or so. The idea was that the sheer strength of the Nasdaq’s trend from 1998 into 2000 pulled money away from a variety of other themes. The end result was a steady upward push by the Nasdaq offset by a downward trend for the Canadian banks.
Below right we have included a chart of the ratio between Japanese bank Mitsubishi UFJ (MTU) and the gold etf (GLD) from 2004 to the present day.
We grant that we are using two different time frames and two very different lengths of time but the argument is that upward pressure for gold prices from 2006 forward has been offset or met by downward pressure on financial asset prices in general and Japanese bank prices in particular.
Our ongoing argument has been that the banking system’s negative trend will not end until this ratio swings back to the upside. For that to happen we need to see gold price weakness and a rising trend for MTU.
Below we compare the BMO/Nasdaq ratio through 2000 with the MTU/GLD ratio from 2009.
The charts show that the lows in both years were reached in the month of March which, we will suggest, helps indicate that the bottom for the U.S. stock market- barring a major upside push for gold prices- was reached about four months ago. While there is no particular reason why the MTU/GLD ratio has to follow the same path as the BMO/Nasdaq ratio through the balance of the year this does lend some support to our assertion that the equity markets will remain under pressure into August before swinging back to the upside. In any event the MTU/GLD ratio would have to rise by a very substantial amount if it is going to return to the highs of 2006 over the next year or two.
