Keep a close eye on the commodity currencies

The so-called "commodity" currencies (those that tend to be correlated with the major global commodity markets) have been very interesting of late. As you can see from the charts below, the Bollinger Bands for AUD/USD, NZD/USD, and USD/CAD all go VERY narrow before this week's break. In fact, the Bands were the narrowest they've been in years, which is generally an indication to expect something explosive to be forthcoming. AUD/USD and NZD/USD both certainly made big threats to do just that earlier this week when they broke down.

AUDUSD Chart

 

Notice too that the Normalized Average True Range (N-ATR), has also gotten very low. This tells us that not only have the daily closes been narrowly spaced (as indicated by the narrow Bollinger Bands), the daily high/low ranges have been getting increasingly small. The implication is that not only can we expect a directional move, we can expect the ranges to expand as well.

NZDUSD Chart

 

We can see a similar sort of move (in the opposite direction) in USD/MXN. The Mexican currency is another one that tends to be very sensitive to commodity and overall risk market moves.

USDMXN Chart

 

It's interesting to note, though, that we actually saw USD/CAD break down prior to the breakdowns in AUD/USD and NZD/USD. It then reversed back up into the range in the move that saw the other two pairs fall out of their narrow ranges.

USDCAD Chart

 

We've now seen all of the breaks reversed to a large degree. The risk there is of a fake-out break which sees the market completely turn and go out the other end of the prior range and develop a new trend in that direction. In this case, it would mean AUD/USD and NZD/USD moving higher, while USD/MXN and USD/CAD would go lower.

Right now I think the charts all suggest a stronger dollar moving forward, meaning a continuation of the AUD/USD and NZD/USD breakdowns (especially given the AUD/USD double top) and a general extension of the USD/MXN uptrend that is highlighted by the blue trend line on that chart. USD/CAD would then be expected to break above 1.0050 and continue higher. The implication here would be that stocks and interest rates would fall, along with the commodity markets in the weeks to come.

If there's to be a fake-out break, though, USD/CAD may be the canary in the coal mine. The Canadian currency is the one that has performed best of late. If that market cannot overcome the resistance in the 1.0050 area, then the prospects for a fake-out break will be quite good and all our stock-invested retirement accounts will likely be much better off.

 

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