Martin Arnold
Director –FX & Macro Strategist
[email protected]
16th May 2017
ETF Securities FX Research:
Commodity currencies in the doldrums
Summary
•
Commodity currencies have outperformed commodities,
but there is more weakness to come as external and
internal economic weakness combine. The NZD could
buck the trend if dairy prices continue higher.
•
Central banks remain comfortable with local currency
weakness, allowing a more smooth economic
readjustment after the oil and commodity boom.
•
Commodity currency downside will be tempered by broad
USD weakness. The negative correlation has weakened
and we expect this to only have a moderate impact.
Commodity currencies outperform
Commodity markets have had a tough 2017. Commodity
currencies have naturally followed suit but by far less a
degree because FX, as an asset class, is less volatile.
Although commodities and commodity currencies have
declined 5.2% and 0.2%, respectively, since the
beginning of the year, it comes after a year of gains in
2016. While commodity currencies have been relatively
resilient, weak domestic fundamentals will be a weight
Canadian Dollar (CAD) and the Norwegian Krona
(NOK). With both CAD and NOK reaching multi-month
lows, the OPEC meeting looms large, with the potential
threat of further downside. We expect a binary result
from the upcoming OPEC meeting: either a move to
deepen crude output cuts or nothing at all. We believe
the latter is more likely and that disappointment from
OPEC will pressure oil and the CAD and NOK. OPEC has
long had a quota adherence problem and this time
around its no different: the ‘smoke and mirrors’ output
targets from 2016 have failed to have the desired effect
and the world remains awash with oil. The problem at its
upcoming meeting is for members to reach a consensus
and we feel this outcome is unlikely, as most members
have no fiscal motivation to reduce output.
OPEC Threat
110
Brent crude (lhs)
20
Norwegian Krone (rhs)
80
Canadian Dollar (rhs)
10
50
on performance in coming months.
0
20
Commodities & Currencies
350
-10
-10
300
-20
-40
250
-70
2012
200
2013
2014
2015
2016
2017
-30
Source: Bloomberg, ETF Securities, data available as of close 1 0 May 2017
150
100
Morgan Stanley Diversified Commodity Long
Basket Index
50
Bloomberg Commodity Index
0
2002
2004
2006
2008
2010
Currency weights:
AUD 27%
CAD 30%
NOK 29%
NZD 13%
2012
2014
2016
Source: Bloomberg, ETF Securities, data available as of close 1 6 May 2017
OPEC risk looms for CAD and NOK
Oil will override (but supplement) domestic factors to
remain the main driver of the direction for both the
Norway’s economy is improving, despite a gradual
restructuring away from a dependence on oil activities.
The relatively buoyant economy has offset weak oil
performance. Although the jobs market is tightening
gradually, excess capacity is keeping wage growth muted.
As a result of the 2016 jump in oil prices, actual CPI is
well above the central bank target (close to 2.5%), but its
expected to trend downward in 2017, reflecting oil price
declines in 2017. The Norges Bank has retained a neutral
Investments may go up or down in value and you may lose some or all of the amount invested. Past performance does not guarantee future results.
2
ETF Securities Research 2017
policy stance and rates are constrained on the upside by
for the Australian business investment, particularly the
pipeline inflation pressure being muted (oil prices
mining sector, to improve despite a new infrastructure
falling) and to the downside by rising risk of a housing
package being announced in the 2017 Australian budget.
crisis. The Krone will likely depreciate against major
Weakness in domestic consumption alongside the
currencies in coming months, particularly the Euro.
readjustment in mining sector will see AUD move
Canada’s currency has been beset by not only falling oil
prices in 2017, but also threats and actions of trade
protectionism from the Trump Administration. CAD is
near its lowest level in almost a year and with 75% of
toward the lower end of the recent trading range. The
Reserve Bank’s policy is neutral and is unlikely to change
as the resilience of the AUD is ‘likely to have added some
downward pressure on prices’ and inflation is only
expected to return to target in early 2018.
exports going to the US, any further protectionist
rhetoric or measures are likely to see additional
The New Zealand central bank (RBNZ) has also retained
weakness for CAD. Growth is expected to continue to
a similarly dovish outlook to its Australian counterpart.
slow and there is considerable slack in the jobs market,
The RBNZ was optimistic that a sustained weakness in
due to reduced oil sector investment. Unemployment
its currency would help rebalance its growth outlook. By
remains virtually unchanged and will keep wage growth
forecasting to keep rates on hold until Q3 2019, there
restrained. As such, we expect the Bank of Canada to
appears no domestic factors that would be a significant
keep its policy rate unchanged for an extended period.
upside catalyst. However, the country’s key commodity
China stabilising to limit AUD losses
There is a strong correlation between the terms of trade
(the amount that Australia receives for its exports
relative to what it pays for imports) and the Australian
Dollar (AUD). Iron ore is a key export commodity, with
Australia being the world’s largest exporter. With China
being the largest iron ore importer and Australia’s
largest trading partner, the Chinese economy remains a
exports, dairy products, could provide that upside. The
vast majority of dairy production (95%) is exported and
it accounts for 25% of total exports. China is key too, as
New Zealand’s top dairy export market. Dairy export
prices rose 29 percent between December 2015 and
March 2017. If the trend continues, this will be above the
RBNZ’s central assumption and could lift NZD.
Dairy upside for NZD
0.95
NZD/USD (lhs) (6mth lag)
significant determinant of the AUD’s performance. As a
result, concerns over the outlook for the Chinese
1800
NZ Global Dairy Trade Price Index (rhs)
0.85
1400
0.75
1000
economy have been a headwind for the currency. China’s
economic stabilisation will limit the downside for the
AUD, but the weak domestic picture, alongside neutral
central bank policy will see AUD move lower in coming
months.
Strong commodity link
1.3
170
0.55
2010
2011
2012
2013
2014
2015
Source: Bloomberg, ETF Securities, data available as of close 1 2 May 2017
2016
200
1.2
160
1.1
150
USD a key commodity currency
1
140
130
0.9
120
0.8
110
90
600
Source: Bloomberg, ETF Securities
180
100
0.65
0.7
RBA Commodity Index (lhs)
AUD/USD (rhs)
80
2010 2011 2011 2012 2012 2013 2014 2014 2015 2015 2016 2017
0.6
0.5
Source: Bloomberg, ETF Securities, data available as of close 1 5 May 2017
The stabilising growth path of China isn’t a catalyst for
near-term upside for the AUD as it could take some time
Commodity currency weakness will be somewhat
tempered by a decline in the USD as we move into Q3.
The USD weakness will be driven by negative real rates
and the potential for the US Fed to disappoint at its June
meeting. There is historically a negative correlation
between commodities and the USD but this has
weakened recently and is now at the highest level in over
three years. In turn, we expect USD weakness to only
have a moderately positive impact.
Investments may go up or down in value and you may lose some or all of the amount invested. Past performance does not guarantee future results.
3
ETF Securities Research 2017
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