Crude Oil’s bounce early this week, had short sellers scrambling from their positions but the reality is that the respite will be short lived. Global prices are forecast to continue their slide in a move that provides a gloomy future outlook for the commodity currencies.
The Australian, Canadian, and New Zealand dollars have all experienced a significant selloff throughout the year and subsequently retreated to levels not seen since the onset of the global financial crisis. In particular, Australia is dealing with a sustained fall of iron ore prices and an economy highly focused upon the mining industry. In comparison, New Zealand and Canada are also experiencing a significant downturn in their major export industries, dairy and oil.
The respective nations are all grappling with economies highly concentrated toward commodity production and exports. The reality is that currencies like the Australian and Canadian Dollar are facing further down-side risk, especially considering the potential for a significant domestic slowdown in China. In fact, forecasting by some analysts has highlighted the risk of a 14% drop to the CAD based on falling energy sector demand.
The other looming risk on the horizon to commodity currencies is a hawkish U.S. Federal Reserve intent on raising interest rates. The negative correlation between the US dollar and the aforementioned currencies is clear as they both start to trend in opposite directions. Subsequently, the U.S. talk of raising rates is fuelling an, already substantial, short bias of currencies reliant upon commodities.
Long term forecasting of commodity prices is also adding to the case for further depreciation of the Canadian and Australian Dollar. In particular, long-run Iron Ore predictions show the commodity still facing additional price declines, in a move that will strongly impact the Australian economy.
The Bloomberg Commodity Index also tells an interesting tale as the key metric fell to a 13 year low recently. The decline in the indicator has mirrored much of the slowing manufacturing activity occurring in mainland China. The index is watched closely by many as the harbinger of contraction within Australia and Canada and many now question whether the commodity dependent countries will experience recession in the early part of 2016.
The reality is that Canada, Australia, and New Zealand have hitched their respective economies to a burgeoning and expanding China. Their respective GDP diversities are limited and they therefore face the very real prospect of contraction within their economies in the medium term.
Ultimately, caution should be the order of the day when positioning for any potential long-side corrections within the commodity currencies. A significant demand slow down, coupled with the possibility of further accommodative monetary policy from their respective central banks, means that the currencies are likely to move in only one direction in the medium term…lower.
Risk Warning: Any form of trading or investment carries a high level of risk to your capital and you should only trade with money you can afford to lose. The information and strategies contained herein may not be suitable for all investors, so please ensure that you fully understand the risks involved and you are advised to seek independent advice from a registered financial advisor. The advice on this website is general in nature and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. The information in this article is not intended for residents of New Zealand and use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Knight Review is not a registered financial advisor and in no way intends to provide specific advice to you in any form whatsoever and provide no financial products or services for sale. As always, please take the time to consult with a registered financial advisor in your jurisdiction for a consideration of your specific circumstances.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold price sits at all-time highs above $2,230, US PCE eyed
Gold price hit all-time highs at $2,236 on Thursday to finish Q1 2024 with a bang. Most major world markets, including the US are closed due to Holy Friday, leaving volatility around Gold price highly subdued. US PCE inflation and Powell are awaited.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.