Today as North American government bonds spike higher, volatility is roaring and stock and commodity prices are writhing through another day of violent convulsions. Oil has been down, up and all around, taking the world’s commodity currencies strongly higher on the morning. After 5 years of falling, “have we bottomed yet?” is the obvious question for commodities and commodity-currencies like the Aussie and Canadian dollar.
As we look at this chart of the Canada dollar index (FXC) since 2006 , we note that the last cycle decline took just 11 months from the October ’07 high to September ’08, and then a sideways grind for a further 6 months to the March ’09 bottom, which also coincided with the bottom in bullish sentiment, equities (that were -50%+), oil and other commodities.
The major catalysts for the sharp ‘v’ bottom in March ’09 can be compared with today as follows:
1. In spring 2009, FASB suspended mark to market accounting rules and allowed banks to not price bonds at market value on their balance sheets (still suspended today, but this isn’t a new ‘trick’).
2. Central banks slashed interest rates and poured trillions of stimulus dollars into financial intermediaries (today policy rates are already near nil and less and central banks have already used up all their stimulus dollars over the past 5 years).
3. Having fallen 55%, large cap stocks reached fair market valuations in March 2009 –not cheap or undervalued, but the best valuations seen in 12 years (today the S&P 500 is off just 10% from its high and still sporting the most expensive valuations in history).
4. Investor sentiment that believed the world was ending in the spring of 2009 drove liquidity-desperate participants stampeding into the US dollar and US Treasuries looking for a safe haven (today equity market sentiment remains optimistic and complacent).
The question then is can the top already be in for the US dollar and US treasuries this cycle (and hence the bottom in commodities and commodity currencies ), if investor panic and liquidation is yet to be seen in broad equity markets? There can be no certainty, but investors have to make their own assessments of probabilities and position capital accordingly. Only time will tell the outcome.
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