Tuesday, July 26, 2011

Commodity currencies have become less dependent on commodities

The currencies of the large exporters of raw materials are becoming less correlated with the dynamics of commodity prices as investors choose them as a refuge from the debt issues in Europe, the United States and Japan.

The following figures speak for themselves: S&P’s GSCI Total Return index of 24 commodities lost 8.45% since April, while Canadian, Australian and New Zealand’s dollars and Norwegian krone added 1% on average during the same period. 

Strategists at BMO Capital Markets claim that Canadian dollar seems to have outpaced its commodity-price fundamentals.

Analysts at Citigroup underline that the desire of the central banks, especially the Asian ones, to diversify their reserves is a significant driver of commodity currencies. Strategists at Mizuho Corporate Bank note that the greenback is slowly but surely losing its status as the world’s reserve currency, while Australian and Canadian dollar are now the majors with large markets.

According to the IMF data, the share of the world’s currency reserves denominated in “other currencies” such as Aussie, kiwi and loonie rose from 3.6% a year ago to 4.7% in the first quarter. The greenback that accounted for 72.7% of the reserved 10 years ago represented 61.8% in the first 3 months of 2010 and 60.7% at the beginning of 2011.

Another reason of commodity currencies’ strength is relatively higher interest rates. Investors will get about 4.35% more from 2-year government bonds in Australia, Canada, New Zealand and Norway than from Treasuries of similar maturity.

daily audusd 12-23
Chart. Daily AUD/USD

published by FBS Holdings © 2011