What’s Up with Commodity Dollars?

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One of the more interesting recent developments in the currency market has been the sharp price divergence amongst the commodity dollar block. For the longest time the commodity currencies traded in tandem rising and falling with the vagaries of risk appetite. Amongst the three, the Aussie with the largest yield in the G-20 universe was always the leader of the pack performing best when risk appetite was highest.

However, that dynamic has changed greatly as the boom driven by China’s insatiable demand for iron ore and other hard commodities tapered off. As China curbs its massive capital spending plans, Australia finds itself with a bloated currency, challenging terms of trade and and markedly slowing growth. The latest economic data points out of Australia has been worrisome with Retail sales contracting, housing demand declining and manufacturing production still mired below the 50 boom/bust level. Although employment has held up relatively well, the gains is jobs came from the temporary rather than permanent sector.

The slowdown in Australian economic growth has force the RBA to lower rates to the 3.00% level and many market participants expect perhaps another 50 basis points of easing before the central bank is done. Furthermore, Australian monetary and fiscal officials continue to comment on the strength of the Australian dollar which remains above parity versus the buck. During the heydey of Chinese demand, high Australian exchange rates were not a barrier as demand for raw goods remained unabated. However, now that Australia must seek different avenues for growth, the exchange becomes a serious competitive disadvantage and there is no doubt that authorities would like to see it slide below parity. For now the Aussie has held above the 1.0250 support level, but continues to make progressively lower highs as selling pressure remains on the unit. Therefore a break below 1.0250 could open the path towards 1.0150 and possibly parity especially if RBA cuts rates further diminishing the Aussie interest rate advantage.

Meanwhile across the Tasman sea the kiwi has been remarkably resilient as the demand for soft commodities like dairy and wheat remains buoyant translating into much better than expected economic performance. New Zealand PMIs and Retail sales both surprised sharply to the upside indicating the economic activity continues to improve. Furthermore, New Zealand officials remain unconcerned about the recent strength in the kiwi with PM John Key even stating that consumer were better off with a stronger currency. Little wonder then that the kiwi has remained near its yearly highs. The pair sees resistance at the .8500 level but if it can break through with conviction the kiwi could climb as high at .8700 further widening the gap between it and the Aussie.

Lastly the loonie has also shown signs of strain over the past month as a decidedly dovish BOC and a series of disappointing data points have pushed the pair above parity. Despite the relatively strong growth in the US and oil at nearly $100/bbl the Canadian economy has not been able to benefit. Employment data saw surprising drop in jobs to -21.9K versus 4.5K expected while Manufacturing Sales contracted -3.1% versus -0.4% eyed. If this week’s Retail Sales prove to be a disappointment the loonie could see even more selling as any hope for more restrictive monetary policy will evaporate. With Canadian officials, much like their Australian counterparts seeks a weaker currency the little dollar could continue its decline against North American neighbor. For USD/CAD the 1.01000 level remains the key resistance point. A break higher there could open up the path towards 1.0300 as the quarter proceeds.

For now its clear that the days of risk on risk off trade are over and the each commodity currency will trade on its own dynamics in 2013.

Boris Schlossberg
Managing Director

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