Brave New World

Commodity currencies stay king 07/10/2009

The AUD, NZD and CAD all reached new 12 month highs against the USD today, as commodities continued their bullish run. Gold reached a new high of $1,048, oil was up  $1.34 to $71.75 a barrel, while soft commodities were supported by forecasts of rain and snow in central United States. Although the USD has since clawed back some of the gains from these currencies, as well as the JPY, EUR and GBP,  a lack of economic data in the US session has failed to provide strong direction to the FX market. Or rather, the market appears to be ignoring any data that may provide a reversal to existing trends; a weaker USD and GBP. Worse than expected, read negative, Q2 Eurozone data made a limited impact on EURUSD, whereas better than expected UK Nationwide consumer confidence figures did little to support Sterling; still reeling from Tuesday’s dire Industrial Production data. Tomorrow’s ECB and BOE meetings on interest rates are unlikely to produce any surprises, although a return by ECB officials concerning “volatility” in the markets may produce some movement.

An emerging theme among commentators in the FX market has been towards the rediscovery of interest differentials as a driver for currency movements. The RBA’s decision to increase interest rates is the first of its kind in the most actively traded G10 currencies, signaling to some FX strategists at least, some return to normality. With expectations among the investment community and domestic monetary policy makers for continued low interest rates in the US and UK well into 2010, the FX market may see further gains among the commodity currencies, particularly the AUD in the next few weeks and months. Beyond, the end of this year, prospects for the AUD, NZD and CAD may be far less certain.

A continued rally in, for the example, the AUD, relies quite heavily on the premise of continued strong, unimpeded economic growth in China and the Far East. Stephen Roach in today’s FT returns to his familiar theme of global imbalances. He warns that China’s path to growth is arguably as unstable for the region and world economic growth and the deficit fueled recovery in the US.