Caution reigns over commodity currencies

New Zealand currency in Wellington, New Zealand on Wednesday, January 23, 2008. Photographer: Mark Coote/Bloomberg News©Bloomberg

Commodity currencies were boosted by data showing China hitting its growth target on Friday, however FX strategists warned the benefit may prove shortlived if Sunday’s gathering of oil producers in Doha fails to address the sector’s supply glut.

China’s 6.7 per cent growth for the first quarter pushed the Australian dollar up 4 per cent and drove the New Zealand dollar 1 per cent higher, while South Korea’s won gained half a per cent and the Taiwanese dollar also rose.


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Early gains for other parts of commodity FX, such as the Canadian dollar and the Mexican peso faded as Opec’s Doha meeting came into investors’ view, while doubts persist about the outlook for China’s economy.

China and oil, the two bugbears of markets at the start of the year, remain the pivotal drivers of currencies. Commodity and emerging market FX have rallied thanks to greater confidence that China’s economy will avoid a hard landing and from oil prices rising 60 per cent since hitting a 13-year low in mid-January. A becalmed dollar has also given them room to grow.

How long they will continue to rally is a subject of much conjecture.

“The risk is that the longer-term outlook for oil will remain challenging,” said Crédit Agricole strategists, worried about the impact of growing Iranian oil production and stabilising US shale output on supply.

Piotr Matys at Rabobank noted that Russia’s rouble was up 11 per cent on the dollar this year, while the Canadian “loonie” had risen 8 per cent and the Norwegian krone by 7 per cent, so they could be vulnerable if Doha dissapoints.

Given a lot of commodity FX is priced into the Doha meeting, even a positive outcome may not push currencies higher. “It could be a classic ‘buy rumour, sell fact’ market reaction,” said Mr Matys.

China’s economy should also give pause for thought, said Marc Chandler of Brown Brothers Harriman who concluded the market reaction to growth data were muted. That may be because investors cast “a jaundiced eye” at the veracity of Chinese data and doubt whether the figures, even if true, are sustainable.

Why, for example, would Chinese steel output rise to a record high in March when there is a global glut of steel, wondered Mr Chandler. Meanwhile, new yuan loans are nearly a quarter higher than expected.

Two other major weekend events are also being closely watched in the FX market. The outcome of the impeachment vote against Brazil’s president Dilma Rousseff should be known, although again much of the rise in the real this year suggests the market has moved beyond the political crisis.

In Washington, a gathering of G20 financial officials, central bank governors, the World Bank and the International Monetary Fund is set to revisit February’s discussions in Shanghai about the impact of currency movements on the global economy.

Japan’s finance minister has already voiced “deep concern over recent one-sided moves in the currency market” with his US counterpart, underlining how dollar weakness is driving an unwanted strengthening of the yen.

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