Commodities are losing their influence over currencies of nations that depend on raw materials exports as traders seek havens from the deficit and debt turmoil roiling the European Union, U.S. and Japan.
As the Standard & Poor’s GSCI Total Return index of 24 commodities fell 8.45 percent since April, the Canadian, Australian and New Zealand dollars and Norwegian krone gained an average of about 1 percent, Bloomberg Correlation-Weighted Indexes show. When commodities slumped 11.6 percent in the same period a year ago, the currencies fell 2.4 percent on average.
Alternatives to the euro, dollar and yen are attracting traders as bailouts for Greece, Ireland and Portugal grow, U.S. leaders put the nation’s AAA credit rating at risk and Japan struggles to recover from its biggest earthquake on record. The share of global currency reserves in a category that includes Canada and Australia dollars now exceeds that held in pounds and yen, according to the International Monetary Fund.
“The desire for diversification of reserves out of U.S. dollars and euros is part of the reason for the performance of the commodity currencies,” Steven Englander, head of Group of 10 foreign-exchange strategy at Citigroup Inc. in New York, said in an interview last week. “There is a disproportionate willingness or desire to buy some of the commodity currencies now, likely because there is so much concern about the U.S. and the euro zone as well as Japan.”
Movements in the so-called Aussie and New Zealand dollars are declining relative to commodity prices.
The correlation between New Zealand’s currency, known as the kiwi for the flightless bird on the nation’s dollar coin, and the Thomson Reuters/Jefferies CRB index of 19 raw materials has fallen to 0.346 from a peak of 0.626 in March 2010, according to data compiled by Bloomberg. It’s 0.508 for Australia, compared with a record 0.718 in October 2009, the data show. A value of 1 would mean they move in lock step.
Canada’s dollar and Norway’s krone have inverse relationships with the index, meaning they tend to move in the opposite direction of commodities.
Australia’s currency fell about 0.1 percent to $1.0845 as of 3:57 p.m. in New York after gaining 1.86 percent last week. New Zealand’s dollar was little changed at 86.46 U.S. cents, while Canada’s dollar rose 0.2 percent to 94.58 cents per U.S. dollar. The krone traded at 5.4186 per U.S. dollar from 5.4144 in New York on July 22.
The latest data from the IMF show the greenback accounted for 60.7 percent of global currency reserves in the first quarter, down from 61.8 percent a year earlier and 72.7 percent a decade ago. The share for the 17-nation euro fell to 26.6 percent from 27.2 percent and the peak of 27.9 percent in 2009.
A category the IMF calls “other currencies” that strategists say includes the Australian, New Zealand and Canadian dollars soared to 4.7 percent from 3.6 percent. The IMF calculates the reserve allocation share based on data from central banks.
China, the world’s largest reserve holder, doesn’t give breakdowns. China’s State Administration of Foreign Exchange, which manages the country’s $3.2 trillion of foreign currencies, said July 20 that it will continue to diversify.
“Asian central banks are very keen to buy alternative currencies, and the Australian and Canadian dollars have reached a point now where they are major, big-hitting currency pairs,” Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London, said in an interview last week. “The dollar is slowly but surely losing its status as the world’s reserve currency.”
Statistics Canada in Ottawa said last week that net securities purchases by investors outside the country totaled C$15.4 billion ($16.1 billion) in May, the most in a year. Net inflows into the so-called loonie, named for the aquatic bird on the nation’s dollar coin, were higher last week than the past year’s average, according to Bank of New York Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration.
The amount of capital entering fixed-income markets of Canada and Australia is above average, according to Bank of America Merrill Lynch, based on an analysis of EPFR Global data. Australia was second behind Norway in the first week of July.
Investors may be turning to Australia and New Zealand’s currencies to profit from their links with China, according to Deutsche Bank AG, the world’s largest currency trader. China’s economy grew 9.5 percent last quarter from a year earlier and accounts for 25 percent of Australia’s exports, Reserve Bank of Australia Governor Glenn Stevens said in a speech in New York on April 13.
Traders “still have faith in the Asia-growth story generally speaking,” Henrik Gullberg, a London-based currency strategist at Deutsche Bank, said in an interview last week. “They have faith in emerging markets being robust enough to withstand all the potential weakness and the uncertainty that we are seeing in the major economies.”
Raw materials account for about 60 percent of Australia’s exports and 50 percent of Canada’s international revenue, according to data compiled by Bloomberg. Norway is the world’s seventh-largest oil exporter. Overseas sales of milk products, wool and lumber account for about 30 percent of New Zealand’s economy.
Commodity prices have declined since April as economists trim forecasts for global growth. The International Monetary Fund said last month it expects developed economies to expand 2.2 percent this year, down from 2.4 percent in April.
Crude for September delivery fell to $99.87 a barrel July 22 on the New York Mercantile Exchange from $113.93 at the end of April.
While demand is growing for commodity currencies, they each account for less than 8 percent of daily trading in global foreign-exchange markets, according to the Bank for International Settlements’ most recent Triennial survey published in April 2010. The dollar is No. 1 at 84.9 percent, followed by the euro at 39.1 percent.
The dollar’s dominance is unlikely to change even if the U.S. loses its AAA rating, according to John Taylor, whose firm manages $8 billion, including the world’s largest hedge fund focused on currencies.
“Even if the U.S. has a single A, it still will be the currency that everybody is pegged off of,” Taylor said in an interview last week.
The currencies of the U.S., EU and Japan depreciated the last six months, led by the dollar’s 6.47 percent slide.
Federal Reserve efforts to flood the financial system by purchasing $600 billion of Treasuries weakened the dollar. Now, lawmakers risk a default by failing to come to an agreement with President Barack Obama on how to boost the U.S.’s $14.3 trillion debt limit. Standard & Poor’s and Moody’s Investors Service said they may lower the nation’s credit rating if they see any deal fall short of real fiscal reform or if the U.S. misses a debt payment.
“The dollar is losing its ability to rally when equity markets fall,” said John Normand, the London-based global head of foreign-exchange strategy at JPMorgan Chase & Co. “These foreign-exchange market patterns suggest that most investors already view the U.S. as less than a AAA sovereign credit.”
In Europe, officials agreed on July 21 to provide Greece with 159 billion euros ($228.3 billion) of new aid with lower interest rates and longer repayment times. Leaders declined to increase a broader 440 billion euro fund that would buy bonds of debt-laden nations, prompting economists from Citigroup Inc. and Goldman Sachs Group Inc. to question whether it’s big enough to insulate Spain and Italy from contagion.
Greece’s sovereign credit rating was cut three steps today by Moody’s Investors Service, which said the financing package for the debt-laden nation implies “substantial economic losses” for private creditors.
Bank of Japan policy makers kept their target interest rate this month in a range of zero to 0.1 percent to support the economy after gross domestic product shrank following the March earthquake, tsunami and nuclear disaster. The calamities left more than 22,000 people dead or missing, and the government estimates it caused 16.9 trillion yen ($215.2 billion) in damage.
Relatively high interest rates are another lure of the commodity currencies. Two-year government bonds in Australia, Canada, New Zealand and Norway yield as much as 4.35 percentage points more than Treasuries of similar maturity.
Canadian Finance Minister Jim Flaherty said the country will be able to eliminate its deficit as soon as the fiscal year that starts in April 2014.
“It seems like the Canadian dollar has outrun its commodity-price fundamentals,” Doug Porter, deputy chief economist with BMO Capital Markets in Toronto, said in an interview last week. “Quite a bit of the strength in the currency can be directly traced back to the heavy buying of Canadian bonds.”
Australian Prime Minister Julia Gillard has slowed federal borrowing and her government said two months ago that it will return to a surplus by 2013. Exports exceeded imports in May by A$2.33 billion ($2.5 billion), the most in seven months, the Bureau of Statistics said in a report in Sydney on July 5.
The nation’s government bonds have returned 3.94 percent the last three months, the most of 26 debt markets tracked by Bloomberg/EFFAS indexes.
“Investors are definitely having a love affair with the Australian dollar and the bond market,” David Woo, global head of rates and currencies at Bank of America Corp. in New York, said in a July 22 interview.