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Commodity currencies on the turn

<div>OVER the past fortnight, risk aversion has returned with a vengeance as a string of data &ndash; including US unemployment figures and a downward revision to UK first quarter GDP &ndash; disappointed the markets. Foreign exchange markets have reacted predictably with both the US dollar and the Japanese yen strengthening markedly against the commodity currencies.<br /><br />With the advent of quantitative easing in many of the world&rsquo;s major economies, there were increasing fears of inflation. Commodity markets were used as a hedge against rampant rising prices in the future, which benefited currencies such as the Australian dollar (Aussie) and the New Zealand dollar (the Kiwi), which also did well because of their relatively high interest rates. What&rsquo;s more, in a risky market environment, both the Aussie and the kiwi tend to flourish.<br /><br />But risk appetite ebbs and flows depending on the tone of data releases, and after the rally in equity markets, a retracement was always on the cards.<br /><br />BNP Paribas currency strategists recommended going long on commodity currencies back in March &ndash; a basket of Australian dollar, New Zealand dollar and Canadian dollar against the US dollar would have gained 25 per cent &ndash; but they say that this trade now has not only little value left but it may even reverse.<br /><br />Both of these commodity currencies are highly correlated because they are such close neighbours and are tightly linked. Australia exports large quantities of raw materials and is heavily dependent on developments in China. New Zealand will benefit from any resulting boost to Australia. George Tchetvertakov, head of market research at Alpari UK, says that when trading the Antipodean currencies it is more important than ever for retail forex traders to keep an eye on Chinese figures and speeches.<br /><br /><strong>RATE CUT<br /></strong>If China continues to grow at a steady rate &ndash; even now it is expected to grow at 5-7 per cent per annum &ndash; then this will give some support at least to the Australian and New Zealand dollars. However, the Reserve Bank of Australia yesterday said that there was the risk of an interest rate cut in the longer-term and that it would be willing to reduce rates further if needed. Tchetvertakov says that if the global economic situation does get worse then everybody is now going to focus on selling the Australian dollar.<br /><br />If you were looking to take advantage of the risk aversion currently gripping the markets, then you would look to sell the Australian and New Zealand dollars against the greenback or the Japanese yen. While US dollar pairs have&nbsp;advantages in that they are highly liquid, yen pairs are notoriously volatile and can offer the short-term trader some large daily moves.<br /><br />Although the Aussie and the Kiwi are normally highly correlated, there has been talk recently that the two currencies might go through a short-term dissociation because of the unusually large value of New Zealand bond maturities this month &ndash; some NZ$4.6bn worth of uridashi (bonds issued in Japan in non-yen currencies) and eurokiwi bonds mature in July, compared to the usual NZ$1-1.2bn redemptions.<br /><br />Barclays Capital and Australian bank ANZ have highlighted the potential influence on the Kiwi arising from big bond redemptions in July. ANZ said that the New Zealand currency may face some headwinds due to the large amounts of maturities this month.<br /><br />&ldquo;New Zealand yields may still be attractive relative to Japan&rsquo;s but not as attractive as Australia&rsquo;s,&rdquo; it said.<br /><br />This would see the New Zealand dollar fall against the Australian dollar in the short-term at least, opening up a potentially very profitable trade in shorting the Kiwi against the Aussie. However, because the pair is less liquid than the majors, this is a very volatile and risky trade. With fears of a double-dip recession widespread, risk aversion could become entrenched and this would be to the detriment of the Aussie and the Kiwi.</div>