The stability of the Currency Shares Australian Dollar (NYSE: FXA)
and Currency Shares Canadian Dollar (NYSE: FXC) suggest that
the market is favoring commodity based nations.
Chart Courtesy of StockCharts.com
Currency markets are all about betting on the assets, the politics,
and the potential for interest rates of a particular nation or
region. And if you look at the Japanese Yen and the Euro, whose
charts are heading lower, you can see that the market has little
faith in the triad of factors that affect the price of those
countries' currencies.
Japan changes governments more frequently than some people change shirts. And
Europe's unemployment problems, made worse by the global recession, have been
in place for years. Yet, Canada and Australia are resource rich countries and
by comparison to the rest of the world have reasonably stable politics. Australia
has even raised interest rates in the last few months, as it worries about inflation.
If you extrapolate the same dynamics to the U.S. Dollar, which is starting to
strengthen, you can see some parallels. Politically, it's likely that some sort
of more balanced Congress will emerge after the 2010 election. The U.S. economy
is slowly stabilizing. And if the employment report shows any kind of positive
surprise, that will provide more support to the thesis.
What this means is that the currency markets are starting to make distinctions
and predictions about the future. As with all things in the market, it's relative.
Neither the U.S., Canada, or Australia are anywhere near being perfect. The U.S.,
especially has problems with looming budget deficits in the future. Yet, the
U.S. is still the world's largest economy. And it is once again, although it's
not yet being appreciated by the mainstream, a resource rich country, based on
the shale deposits of natural gas as well as with the potential for offshore
oil deposits.
The U.S. also still has vast tracts of unexplored wilderness that could contribute
other natural resources at some point in the future.
What's the bottom line? If the currency markets are correct, change lies ahead,
and resource rich countries are likely to lead the way in the next leg of whatever
is around the bend.
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