Australia, Brazil, Canada, Russia, and South Africa produce and export substantial amounts of crucial commodities. Think of the petroleum, base and precious metal, and agricultural sectors. Marketplace guides label the currencies of these five exporting countries “commodity currencies”. The commodity shares within and the commodity export profile of these national economies varies.

In recent years, there has been a close linkage between trends in the S+P 500, commodities “in general” (use the broad Goldman Sachs Commodity Index as a weathervane), and the United States dollar. Remember the song guideline: “a strong dollar equals weak stocks (and feeble commodities), and a weak dollar equals strong stocks (and bullish commodities)”.

So despite the S+P 500’s new highs in 2012, and though the broad GSCI is not very far from its 762 springtime 2011 peak, suppose there is further weakness in commodity currencies versus the dollar. That probably will point to at least interim tops in commodities and the S+P 500.

What’s the bottom line prediction for the near term? The US dollar will strengthen against the commodity currencies (and the broad real trade-weighted dollar also will rally some). Commodities in general will decline (though the Iranian situation obviously is a notable risk). The S+P 500 (and equity marketplaces of commodity currency nations) will fall. As always, timing is everything. This trend probably will start around March/May 2012, though it may be delayed until summer 2012. The various currency, commodity, and stock (and interest rate) marketplaces of course do not have to peak (or bottom) at the same time. Thus the S+P 500 could peak after (or before) the broad GSCI.

FOLLOW THE LINK BELOW to download this market essay as a PDF file.

Commodity Currencies and the Economic Recovery Story (3-12-12)