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Global Macro: A Bad Time for Developing Economies

NEW YORK ( TheStreet) -- Commodities have seen a strong run up as the U.S. dollar has been under constant pressure for the past month. The issue remains that although oil and gold have risen, countries exporting them have not seen similar strength.

The first example below is of the chart CurrencyShares Australian Dollar Trust (FXA) over CurrencyShares Japanese Yen Trust (FXY). This pair measures the strength of the Aussie/Yen currency cross.

The Aussie is heavily linked to commodities and rises when copper and gold outperform, as well as when the Chinese economy shows support. It is a heavy exporter to China, which explains its link to their success.
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On the opposite side of the trade resides the Japanese yen. The yen has seen selling pressure throughout 2013 due to the unprecedented amount of stimulus the Bank of Japan has embarked upon. In recent months, however, the efficacy of their stimulus has come into question, and a weaker global economy has brought demand for the safe haven currency.

The Aussie dollar sold off on Tuesday as weak economic data from the country sparked the debate over Australia's next rate cut. During a speech, Reserve Bank Governor Stevens claimed that Australia's interest rate should accurately reflect their economic circumstances.

Market's interpreted this to mean a potential cut at their next policy meeting.

Although commodities have shown strength, it looks as if weakness from China and other importing countries is weighing on demand.

The next chart is of iShares MSCI Brazil Capped (EWZ) over Vanguard Total World Stock Index ETF (VT). This pair measures the strength of Brazilian equities over world equities. It is clear that Brazilian equities have underperformed over the past year.

Brazil, too, is a commodity exporting country like Australia. The GDP growth has diminished to below 3%.

This puts growth below some economies in the developed world. Weak global demand will continue to weigh on them, and a stronger dollar could push even more funds out of the country as investors favor U.S. Equities during times of dollar strength.

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