Yes the long awaited breech of the $75 level has finally occurred! The road is now open for a new high in Crude….i.e. above $150. We think that all the efforts by the Fed in rescue and bailout packages have only served to dramatically enhance the probability of crude making another multi-year high over the coming months! Of course only time will tell.
We think that the next big leg up in crude is now getting into gear and accordingly it is not too late to get exposure to oil. We say this because of confirmation of the breakout in crude in the broad commodity market (CRB), currency markets (Aussie Yen and USD Index), and fixed income (TIPS vs. US 10yr)
And where oil goes so too does the big CRB Index. Last night the CRB also closed at a multi-week high. This suggests that the rise in commodities is broad based. A number of individual commodity contracts also hit new multi-week highs.
Our favorite means of gaining exposure to the broad commodity group is via the ETF DBC. Now we have TIPs at a multi-week high vs. the US 10yr so the bond market is now confirming what we are seeing in the commodity market.
The USD Index closed last night well below its last line of support. Now the next level is at the 72 level – some 4.6% away from current levels! This is a sizeable fall for the USD Index but we think that it will probably get to the 72 level before year end!
So don’t be surprised to see the Aussie trade at parity before year end! Of course the Australian Reserve Bank Governor, Glenn Stevens, stating that “Australia cannot be too timid on rate rises” does not do much for bearish sentiment towards the Aussie dollar. And of course last but not least is the Aussie Yen cross which has been a proxy for the carry trade and a leading indicator for commodity prices. It broke to a multi-week high (above 82) last night.
The wheels of inflation are now in motion and those wheels to us appear somewhat bigger than what the average punter/economist can wildly imagine.
