But there is evidence of a possible bottoming out of the housing market. KB Homes (KBH), a housing equity, and the SPDR Homebuilders ETF (XHB) are signaling the worst may be over (see "Is this the bottom?"). They can be a leading indicator for underlying support for the U.S. dollar. If sentiment begins to indicate better housing conditions, this will lead to expectations for a tighter monetary regime. It doesn’t mean that there has to be an increase of interest rates; just the expectation of a better housing sector could shift sentiment in the market and at the Fed that interest rates should rise to head off inflationary concerns. One of the factors missing to date on inflationary concerns has been the housing market. A bottom in the housing market correlates to greater pressure on prices as the demand for lumber and other resources are drivers of the housing market. In fact, with commodity prices rising sharply across the board, you can argue that housing is the only thing keeping the Fed from changing its low inflation outlook.
All this flows into an upcoming bullish scenario for the U.S. dollar. An overlay of the dollar index against Plum Creek Lumber (PCL) and lumber futures (LB) shows that their movements have been pointing to increased demand for lumber for the past two years and, with it, implications for a stronger U.S. dollar (see "Wooden nickel"). Lumber is closing in on previous resistance and a breakout would be an important fundamental shift in demand.
While we can’t pick tops and bottoms in markets, the inter-market relationship between the U.S. dollar and, in particular, the lumber market, are pointing to an emerging bullish condition for the greenback.
Abe Cofnas is the author of "Sentiment Indicators" (Bloomberg Press). He can be reached at firstname.lastname@example.org.