Chart of the Day (05-05-2022)

Steve Strazza
May 5, 2022

From the desk of Steve Strazza @Sstrazza

The US Dollar Index $DXY is ripping to its highest level in 20 years today.

We just covered this dollar strength and what it means in our Currency Report, which you can read here.

We talk about the implications of a stronger dollar on risk assets, particularly stocks.

While this rally in the dollar is definitely not a good thing for stocks in the US or abroad, we see these intermarket relationships dislocate all the time.

Could stocks and the dollar rally higher together? Sure! Commodities and the dollar have already been doing this for several quarters now...

Let's talk about that quick.

This is a chart of Canadian dollar futures and crude oil futures with a rolling quarterly correlation of the two in the bottom panel:

The Canadian dollar is what we like to refer to as a "commodity currency." When commodities are trending well, the CAD tends to be trending well also.

But as you can see in the chart, this hasn't been the case for over a year now. While the CAD has been dancing around in a sideways range since peaking in the first half of last year, crude oil has been grinding steadily higher.

The question we're asking ourselves is simple: who's right here?

Is this run-up in crude oil a valid one, in which case we should anticipate a nice catch-up rally from the CAD?

Or is the CAD flashing an early warning signal that these new highs in crude oil shouldn't be trusted?

We can only know with hindsight.

For now, this relationship is in the "lack of confirmation" category no different from our CRB Index and US Dollar Index chart. This divergence will eventually clear itself up and leave us with some answers.

Until then, we can only trade what's in front of us. This means bullish commodities, bullish oil, bullish dollar, and bearish CAD.

It's nice when the intermarket puzzle fits together and paints a beautiful picture. Unfortunately, this just isn't the case the vast majority of times. Right now, we can chalk the CAD up as another missing piece. They're everywhere these days.

We'll let you know as soon as we get some answers!

Thanks for reading, and please let us know if you have any questions.

Allstarcharts Team

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