Gold Rally Won't Help Commodity Currencies Now. By Nicholas Hastings

Gold's rally towards $1000 an ounce doesn't bode well for commodity currencies as it once might have.

In fact, the rally may well be a signal to sell the Australian, New Zealand and Canadian dollars as they hover around highs for the year against their U.S. counterpart.

The steady advance in these currencies in recent months has represented not only confidence that the Australian, New Zealand and Canadian economies themselves were escaping the worst of the global recession, but that the fiscal and monetary easing in most major economies was ensuring a global recovery.

With strong demand from China keeping commodity prices in general on the rise, there was little reason not to buy the commodity currencies as well.

However, much of this confidence is on the wane.

Sure, Australia will still probably be the first G10 country to start hiking rates again and the currency should benefit as yield differentials move in its favor.

But, neither Chinese demand nor the global recovery are proving quite as robust an initially hoped.

Signs are that Beijing is deliberately slowing its economy in order to prevent an asset bubble, while economic data from the G10 suggest that downside risks remain high.

Instead of discussing concrete plans for exiting their low monetary and fiscal strategies at last weekend's meeting in London, G20 finance ministers were more eager to persuade the markets that any implementation of exit strategies was still far off.

Leading finance officials were keen to stress that the recovery still could not be taken for granted and that the global economy still faces a bumpy ride.

As far as most commodity prices are concerned this is bad news, with lower global demand likely to ensure that prices for commodities such as crude oil have seen their highs for now.

One exception, however, is gold.

As it has periodically over the last couple of years, the price has taken off again heading for $1000 an ounce. The assumption has been that this reflects an investor hedge against fears that inflation will rise now that the global recovery is underway. Gold has historically served as a safe haven when investors are concerned that monetary officials are not tightening policy fast enough.

This time around, though, gold may well be serving more as a haven for investors worried that the global recovery is still at risk, especially if exit strategies are implemented too early.

"Buying some insurance against these risks of the exit strategy seems to explain the precious metals advance," said Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London.

So, while the Australian, New Zealand and Canadian currencies may get a little more support from the strong gold price, this is hardly likely to last very long if the move is driven more by worries about the global recovery.

Early Monday in Europe, the G20 appears to have managed to lift market sentiment with equity prices rising and high-yielders back in favor. The Australian dollar pushed ahead to $0.8522 by 0645 GMT from $0.8517 late on Friday in New York, according to EBS.



Elsewhere, the euro rose to $1.4342 from $1.4301 and to Y133.64 from Y133.06 while the dollar edged up to Y93.17 from Y93.03.