Commodity-Sensitive Currencies Stronger Than Officials Desire

June 22, 2009

Prime Minister Key of New Zealand today became the latest official with a commodity-sensitive currency to warn about damage from recent excessive appreciation in that currency, asserting that “if the exchange rate was to rise too rapidly, that would run the risk of derailing the recovery process.”   Bank of Canada Governor Mark Carney had lodged a similar complaint three times this month, calling the steepness of the Canadian dollar’s advance a once in fifty years event and indicating that intervention, although not ideally suitable to the present environment, cannot be ruled out entirely.

The rise of commodity-sensitive currencies surpasses that which can be explained by strengthening commodity prices alone.  From lows of 1.3017 per U.S. dollar last October 28, USD 0.6009 per Aussie dollar on October 27, and USD 0.5195 on November 20th, the Canadian, Australian and New Zealand currencies had at their early-June peaks recovered 20.7%, 37.5%, and 26.9% to highs of C$ 1.0786, $0.8264/A$ and $0.6595/kiwi.  Published minutes from the Reserve Bank of Australia policy meeting earlier this month observed that the appreciation of the Aussie dollar has reduced the stimulus to the economy coming from earlier depreciation and has taken place to a large extent in offshore trading hours.  From this latter observation, the minutes argue that “currency movements at present were more reflective of changes in sentiment toward the U.S. dollar and risk appetite more generally rather than any specific reassessment about Australia’s economic prospects.”

Another reason for the resurgence of the Canadian, Aussie and New Zealand dollars is that investors suspect central bank rates will not decline further in those countries.  The Bank of Canada overnight target of 0.25% is down from a peak of 4.5%.  New Zealand’s cash rate has dropped 575 basis points to 2.5%, and Australia’s rate has been lowered by 425 basis points to 3.0%.

Capital inflows are offsetting any drag on the currencies from weakened current accounts.  Earlier this month, for example, Canadian officials reported a 3.2% volume decline in exports during April and a return of the trade gap to deficit from surplus.  But today’s release of Canadian portfolio investment flows revealed a huge C$ 7.78 billion net inflow.  Foreigners acquired C$ 5.75 billion of Canadian bonds and another C$ 3.30 billion of stocks, which far exceeded the C$ 1.27 billion of foreign securities bought in April by Canadians.  The net portfolio capital inflow C$ 7.78 billion in April surpassed the first-quarter monthly average of C$ 3.40 billion. 

Rhetorical protests in June have thus far prevented further appreciation of the commodity-sensitive currencies.  The success may be coincidental, however, because oil prices have steadied and gold has declined on balance since early June.  A resumed uptrend in commodity prices would probably have a similar impact on the Canadian, Australian and New Zealand currencies.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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