Commodities currency demand slows as cycle turns
Declines in the value of the currencies of commodities-producing countries might signal the beginning of the end of the commodities super cycle, analysts say, but equally they could represent a shift in patterns of investment flows.
Demand for commodities will continue to grow but at a slower rate than in the past 15 years, according to the IMF’s 2013 World Economic Outlook published in April, and prices will moderate as stockpiling and speculation reduce, and supply catches up with demand.
Chinese economic growth slowed to 7.7% in the first quarter, down from 7.9% in the fourth quarter of 2012. The news came as the IMF cut its 2013 growth forecast for the global economy from 3.5% to 3.25%.
Worries about quantitative easing (QE) coming to an end in the US have exacerbated the effect, because of the positive impact on the dollar, which means downward price pressure on dollar-denominated commodities.
Oil, gold and copper are all down by around 15% since the beginning of the year, the latter plunging through the $7,000-a-tonne barrier.
In April, gold suffered its biggest two-day price drop since 1983 as investors dumped the precious metal amid declines in commodities of all types. Gold is now trading just above $1,400 an ounce, down more than 26% from its all-time high of $1,908 reached in August 2011.
S&P’s widely tracked GSCI spot index, a broad gauge of 24 commodities, is down more than 7% in the past month. The gold price is of particular concern because it is seen as a bellwether for currencies linked to commodities exports.
The Australian dollar has lost around 3.5% of its value against the US dollar in the past three months, falling to around $1.02. Australia is one of the world’s top gold producers and China is the country’s biggest trading partner.
The Canadian dollar is down against the US dollar by around 4.4% in the same period, falling to around C$1.03 to the greenback. Some analysts forecast it will fall to C$1.09 by the end of the year.
Chris Turner, head of strategy at Lombard Street Research, says the setback is not solely because these currencies follow commodity prices.
“Canada and Australia have both benefited from an up-trend in mining investment over the last few years,” he says. “This in particular has kept AUD strong along with a strong Australian economy and higher interest rates than elsewhere.
“Now these factors are no longer as relevant, there is less reason for AUD to stay strong. Canada is slightly different because its terms of trade haven’t been positive for a while now so there’s less of a case for the Canadian dollar.”
AUD and CAD have also benefited to a large extent from the perception that Australia and Canada were economic safe havens that were insulated from the banking crises in Europe and the US. This led foreign reserves managers to build up their holdings of Australian and Canadian government bonds.
IMF figures show central bank holdings of currencies such as CAD and AUD jumped by a quarter during 2012 to reach 6.1% of total holdings.
“Looking at commodity prices now, I would think they might be thinking of diversifying out of commodities currencies and get their holdings down below high single-digit levels,” says Turner.
Australian assets have long been particularly sought after by Japanese investors, with the Australian 3% base rate the highest of any developed country.
AUD and other commodity currencies were expected to get a lift from the Bank of Japan’s (BoJ) plans unveiled at the beginning of April to inject trillions of yen into the economy as part of its bond-buying scheme.
The move should have pushed Japanese bond yields lower, prompting domestic investors to seek better returns overseas in higher yielding currencies, including commodity currencies. However, bond yields have risen sharply.
AUD has been strengthening against the yen all year, spiking above ¥105 in the days after the announcement, but has been tracking lower ever since. However, the theme for the yen going forward is depreciation.
''When the BoJ last did QE in 2001, and carried out FX intervention in 2003 and 2004, we saw a doubling of capital outflows from Japan,'' says Javier Corominas, head of research at Record Currency Management. "If we see a similar pattern of behaviour this time, outflows could be even more significant given the size of QE announced and thus we would expect to see further yen weakening".
"We believe commodity currency currencies should hold up against the yen for now. From a more longer term perspective, some yen appreciation against these currencies is possible if China slows down further''
Corominas says demand for commodities from China will slow as a cheaper Yen effectively "steals" some growth from China and neighbouring countries in the region.
"That said, if this has not yen been priced in already, we may see some weakness in commodity currencies coming sooner rather than later,'' he adds.