The slowdown in U.S. economic growth has resurrected commodity-linked currencies.
This month’s five best performers among 16 major exchange rates are all affiliated with resource-driven economies as investors unwind bets on declines versus the dollar. Brazil’s real leads with a 4.1 percent gain, while a Bloomberg index of seven commodity currencies has rallied 1 percent from last month’s 2.9 percent slide, which was the most since 2011.
The resilience of commodity-linked currencies comes as growth stalls in China, which buys everything from New Zealand’s milk to Brazil’s iron ore, suggesting a delinking from the world’s second-largest economy. Strategists are raising their forecasts after the dollar fell against all but one of its most-traded peers in February and as Citigroup Inc.’s U.S. Economic Surprise Index touched the lowest in more than seven months.
“Investors came into this year thinking they knew the story -- that U.S. data would be good,” Steven Englander, the global head of Group-of-10 currency strategy at Citigroup in New York, said in a Feb. 25 phone interview. “Those expectations were very badly disappointed, and now short commodity-currency positions have to be unwound.” A short position is a bet an asset will decline in value.
Citigroup increased in February its year-end estimate for the Australian dollar to 91 U.S. cents, from 85 last month. The second-biggest currency trader also sees New Zealand’s dollar rising this year, to 85 U.S. cents. The Aussie bought 89.58 U.S. cents and the kiwi 84.08 cents as of 8:48 a.m. in London.
The Norwegian krone strengthened 3.8 percent versus the dollar this month, the most among major currencies after the real and kiwi, which rose 4 percent. Rounding out the top five, South Africa’s rand appreciated 3.8 percent and the Aussie was up 2.4 percent.
Economists are rushing to keep up with the moves, boosting first-quarter forecasts for the rand, real, kiwi, Canadian dollar and Chilean peso by an average of 1 percent since the start of the year, according to data compiled by Bloomberg.
Commodities, which are priced in dollars and tend to rise as the currency cheapens, have jumped in February. The Standard & Poor’s GSCI Official Close Index has advanced 4.1 percent, its biggest gain since July, while crude-oil futures climbed 4.7 percent, touching a four-month high of $103.80 per barrel in New York on Feb. 19.
Citigroup’s Economic Surprise Index for the U.S. fell to minus 14.6 on Feb. 25, the lowest since July 15, as economic data from jobs and manufacturing to retail sales trailed forecasts. The gauge’s average over the past year is 17.
China is seeing signs of a manufacturing slowdown, with a gauge of factory output missing economists’ forecasts on Jan. 29, a week after an initial estimate triggered the biggest developing-nation currency slump in five years.
China’s $4.8 trillion of shadow-banking debt, which occurs outside the regular banking system and often beyond the control of regulators, also raises concern that economic shocks will cloud the growth outlook for a country that’s the biggest trade partner for Australia, Brazil and South Africa. The currencies of those countries have increased by an average of 3.4 percent against the greenback in February.
“People are dismissing any uncertainties about China,” Dan Dorrow, the head of research at Faros Trading LLC in Stamford, Connecticut, said in a Feb. 26 phone interview. “They’ve got confidence that global growth will gradually accelerate, which is a risk-positive scenario that’s particularly good for commodity currencies.”
Declining volatility has reduced the risk of unexpected price moves, making it more difficult for traders to make money in foreign exchange and prompting them to more aggressively seek the higher yields offered by commodity-linked assets.
JPMorgan Chase & Co.’s Global FX Volatility Index fell to 7.64 percent on Feb. 25, the lowest close since Oct. 28 and down from a 2014 high of 8.98 percent on Feb. 3. Average implied volatility for the seven commodity currencies included in Bloomberg’s index fell on the same day to the lowest level in more than five weeks.
“The stability that we’ve seen in foreign-exchange markets in February has been a key driver for emerging-market or commodity currencies,” Hamish Pepper, a currency strategist at Barclays Plc in Singapore, said in a phone interview yesterday. “Commodity currencies have a correlation with risk appetite. Whenever you get periods of stability and improving sentiment, these are the currencies that historically do well.”
Barclays’s first-quarter forecasts have gotten more bullish for six of the seven commodity currencies in the Bloomberg index since the start of February, with the Canadian dollar the only exception.
With the performance of the commodity-linked currencies tied so closely to U.S. data and, as a result, the tapering of the Federal Reserve’s monetary stimulus program, some see an economic rebound threatening recent gains.
Fed Chair Janet Yellen repeated yesterday in Senate testimony that the central bank is likely to maintain its strategy of gradually trimming bond purchases, even as it takes time for the jobs market to recover. Bond-buying tends to debase a currency by adding dollars to the economy. The Fed has trimmed monthly purchases to $65 billion, from $85 billion in 2013.
“If the data comes in April and it starts to look good, then the U.S. dollar may well find its feet,” Ray Attrill, the Sydney-based global co-head of currency strategy at National Australia Bank Ltd., said in a Feb. 26 phone interview. “That may actually be associated with commodities giving back some of their recent gains.”
National Australia Bank forecasts the Aussie will weaken to 84 U.S. cents and the kiwi to 77 U.S. cents by year-end.
The relative outperformance of commodity currencies has coincided with a rebound in other high-yielders. A Bloomberg index of the 20 most-traded emerging-market currencies has gained 1.9 percent this month after tumbling about 3 percent in January to the lowest in almost five years.
The rout was sparked by events ranging from the Fed’s decision to start pulling back on stimulus to the Chinese manufacturing slowdown and Argentina’s move to devalue its peso.
“Just like emerging markets, your high-beta currencies actually did really well at the times that markets were questioning U.S. data,” Paresh Upadhyaya, the Boston-based director of currency strategy at Pioneer Investment Management Inc., which oversees $236 billion, said in a Feb. 26 phone interview. “People were wondering whether the data softness was weather-related or something more ominous. That questioning took some pressure off the commodity bloc currencies.”
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