The new safe havens
SIGNS pointing to a slowdown in global growth make life slightly trickier for forex traders since currencies tend to appreciate if the domestic growth outlook is good. In among all of this economic uncertainty, the job of the forex trader is to sniff out where growth is most likely to be found.
Countries that don’t have to implement austerity budgets in the coming years are a good place to start. Commodity exporters such as Norway, Canada and Australia all have relatively strong public finances compared to the US, Europe and the UK, and don’t require years of slimmed-down public budgets.
This has led analysts at Societe Generale to call the commodity currencies the new “safe havens”, which is typically attributed to the US dollar, Japanese yen and the Swiss franc.
But for this to happen, currency market convention would have to turn on its head. Traditionally the Aussie dollar, Canadian dollar and the Norwegian krone move in line with equity markets because their countries’ fortunes are tightly connected to the prospects for global economic growth. This would suggest that commodity currencies should be on the back foot. Indeed, the Aussie dollar has fallen 7 per cent against the US dollar since the period of market turbulence began in April. However, this equates to only half of the 14 per cent fall for the S&P 500 index over the same time period.
Does this suggest that commodity currencies are no longer as aligned with risky assets? Analysts at Societe Generale note: “even as double-dip recession fears grip global markets, (the commodity) currencies have held up well”. The commodities boom since March last year has helped to boost government coffers in Australia, Canada and Norway, which have helped to immunise them from sovereign debt problems. So even though commodity markets have come off – the Reuters/ Jefferies CRB commodities index has fallen 9 per cent since April – these countries are still in good economic shape.
But before another climb higher, commodity currencies could take a breather, says Currencies Direct’s Mark O’Sullivan: “If you have had long positions in the Aussie or the Canadian dollars in recent months then you’ve had a fantastic run, so now might be a sensible time for some profit taking.” He adds that the interest rate differential has added fuel to commodity currency appreciation – Australia, Norway and Canada have all raised interest rates this year and rates are 4.5 per cent, 2 per cent and 0.5 per cent respectively, compared to 0-0.25 per cent in the US. In the absence of a severe slowdown in China, this yield differential should particularly help the Aussie to appreciate even if China’s growth machine slows later this year.
So while analysts come up with acronyms to describe the new normal of sluggish growth rates in the west, currency markets have their own “new normal” to contend with: commodity currencies that trade like safe havens.