FYI | Aug 26 2008
By Chris Shaw
As commodity prices have gained in recent years so too have the so-called commodity currencies such as the Australian and Canadian dollars. Standard Chartered notes the process has been driven by a de-basing of currencies, generally on the back of excess US dollar liquidity.
This de-basing has driven investors to seek harder currencies, such as commodities, and as commodity prices have been pushed higher, so too have the commodity currencies at the expense of the greenback. Also supportive have been an improvement in the terms of trade from the increase in commodity prices and inflows of capital from rising interest rate expectations.
But as the group points out, this process has now begun to reverse, with the Canadian dollar down by more than 6.5% against the US dollar so far in 2008. The Aussie dollar has fallen by 2.3% and the Kiwi dollar almost 10% over the same period as commodity prices struggle and amid a growing expectation of interest rate cuts to stimulate economic growth rather than further hikes to combat inflation.
This pressure on the commodity currencies is likely to continue in the shorter-term, in the group’s view, as global money supply has been decelerating at the same time as the global economy has weakened. Here China has also played a role, as inflows from the Chinese demand for exports helped drive a number of commodity currencies. But the recent cooling of this demand means there is now less support.
In Standard Chartered’s view it won’t only be the larger currencies such as the Canadian and Aussie dollars that continue to struggle, as other commodity related currencies in Africa and Latin America may also come under pressure if the correction in oil and metal prices continues.
