Aussie to Real Defy Commodity Rout as Fed Defangs Rate Increase

  • Real, rand and Aussie lead week's gains versus greenback
  • Commodity gauge falls for sixth week, iron ore at 4-month low

Commodity currencies including the Australian dollar, South Africa’s rand and the Brazilian real are surging as traders focus on the potential for a gradual cycle of U.S. interest-rate increases and ignore a rout in raw material prices.

The U.S. dollar is unwinding some of the gains that sent it to a 12-year high against the currencies of its trading partners after minutes of the Federal Open Market Committee’s October meeting signaled policy makers will take a shallow path as they raise rates as early as next month for the first time since 2006. The Aussie is poised for back-to-back weekly advances, with traders paying the smallest premium on options to protect against weakness in the currency in more than a year even as iron ore, Australia’s chief export, dropped to a four-month low.

“Traders are pulling back from their long dollar trades for now, given speculation that the Fed’s tightening cycle may be more gradual than the market had previously priced,” said Imre Speizer, markets strategist at Westpac Banking Corp. in Auckland. “For now, the unwinding of positions built around the Fed tightening is dominating concerns about commodity weakness. I don’t think it will last.”

The Aussie traded at 72.01 U.S. cents as of 6:45 a.m. in London from 71.94 on Thursday, poised for a 1 percent advance this week. New Zealand’s dollar fetched 65.83 U.S. cents after climbing 1.5 percent to 65.66 in the previous session. The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, was little changed at 1,228.17 after declining 0.7 percent on Thursday, the biggest drop since Oct. 14.

The Fed’s Trade Weighted Broad Dollar index rose 9.2 percent this year to 121.5 as of last Friday, the most recent reading. That’s a level unseen since April 2003.

Commodities Slump

The Bloomberg Commodity Index has fallen 0.8 percent this week and is down 6.4 percent so far this month. The price of iron ore has dropped 5.6 percent since Nov. 13.

The greenback has climbed against all of its 16 major peers this year as a strengthening U.S. economy underpinned speculation that the Fed will raise interest rates at a time when many peers are cutting borrowing costs or carrying out asset purchases. The likelihood of higher rates by year-end is 68 percent, futures show. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

The premium investors pay for the right to sell the Australian dollar against the greenback over contracts to buy reached 0.82 percentage points on Thursday, the least since July last year, according to one-month risk-reversal rates.

“There is no way these currencies will rise,” Yuji Saito, head of the foreign-exchange department at Credit Agricole SA in Tokyo. “All it is, is the unwinding of excessive long positions in the dollar index. People want to take profits on dollar longs.”

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