FOR most of this year the strength of the commodity dollars has been one of the most consistent trends in the currency market. Both the Australian and the Canadian dollars spent the better part of 2011 trading above parity to the greenback, and as a result New York has been flooded with Australian tourists all summer, long enjoying the benefits of a strong currency.
Now, however, the party may be coming to an end. Slowdown in global growth, decline in equity markets and decidedly more dovish monetary policies from the central banks of Australia and Canada could all combine to threaten the commodity dollar rally. Moreover, recent data from both Australia and Canada have been surprisingly weak, indicating that growth in the second half of this year may be much weaker that the market believes.
The latest labour statistics from Australia and Canada shocked the markets as both economies shed jobs. In fact, overall job growth Down Under has averaged only 2,800 new positions this year versus an average of 30,500 in 2010. The decline in labour demand is likely to weigh on consumer sentiment and curb spending for the foreseeable future.
Furthermore, business sentiment in Australia has declined markedly as well, with the latest reading dropping to -8 versus 2 the month prior. This was the first time that confidence turned negative since the start of this year, as slower economic growth and increased market volatility are starting to take their toll on business activity. Although the RBA continues to maintain its neutral posture, the markets are pricing in 100 per cent possibility of a rate cut at the October meeting, as traders anticipate that the Australian central bank will have to ease monetary conditions to avoid a further slowdown in growth.
Although the economic calendar for both Canada and Australia is relatively barren for the rest of this week, both currencies are likely to remain under pressure. The two currencies are now likely to approach parity from the opposite sides of the spectrum, as Aussie has failed to hold support at Au$1.0500 figure while loonie has been unable to remain below Au$1.0000 as the market is quickly losing its appetite for risk.