The End Of The Rally For Commodity Currencies. By Nicholas Hastings

Commodity currencies have risen just about as far as they can go for now.

Sure, as the world economy recovers they should still remain on top.

But, that global recovery now looks likely to be slower than investors had anticipated and, with commodity prices themselves putting in a flat performance over the last few weeks, the immediate outlook for commodity currencies is deteriorating rapidly.

"The risk of a correction is mounting," is how the currency strategist team at Commerzbank put it in their latest summary on the premier commodity currency, the Australian dollar.

In the case of the Aussie, gains of well over 30% have been made since the start of the year against the dollar, fueled not only by the prospects of rising demand for commodities but by the strength of the Australian economy itself.

This has made it likely that the Reserve Bank of Australia will be the first of the major economies to start hiking rates after the credit crunch.

However, although some aspects of the Australian economy remain robust, employment data came in weaker than expected last week and could well ensure that the RBS postpones any rake hikes until early next year instead of moving well before Christmas, as Australian money markets are currently suggesting.

But, it is the lowering of forecasts for global growth that will provide an even greater knock for the Australian, New Zealand and Canadian currencies.

Data from across the globe over the last few weeks has continued to disappoint expectations, suggesting that commodity demand will fail to meet expectations.

Even the latest figures from China, which has been instrumental in driving commodity prices higher, haven't met forecasts. Last week, the purchasing managers index for manufacturing industry rose to 54.3 in September from 54.0 in August but was nowhere near the 55.0 that the market had anticipated.

Apart from taking the steam of the commodity price rally, the rising concern over the global economy is reducing investor appetite for high-yielders - a shift in investor sentiment that is working directly against currencies such as the Aussie.

The strength of the recent rally in commodity currencies is also working against them politically. In the case of the Canadian dollar, the rise is now seen posing a threat to the Canadian economy.

Bank of Canada Governor Mark Carney is becoming increasingly vocal with his concerns that the Canadian dollar is moving away from "underlying fundamentals."

With the risk of verbal intervention also becoming an issue for these currencies, investors could well find themselves showing less enthusiasm for extending the rallies that have kept them so strong for most of the year.

Early Monday in Europe, the Australian dollar remained firm, rising to $0.8735 by 0645 GMT from $0.8675 late Friday in New York, according to EBS.




The failure of G7 finance ministers to renew strong dollar pledges after their meeting in Istanbul at the weekend left currency markets being driven by economic fundamentals.

Despite a disappointing U.S. non-farm payrolls figure Friday, forecasters are looking for an improvement in the latest Institute of Supply Management survey for non-manufacturing, with the index set to rise to 50 from 48.4.

The dollar is up at Y89.85 from Y89.75, helped by Japanese importer buying as well as a warning by Japan's finance minister, Hirohisa Fujii, over the weekend that "appropriate steps" to curb the yen's advance would be taken if needed.

The euro is up at $1.4630 from $1.4572 and at Y131.44 from Y130.79.