Glacial growth threat to commodity currencies

Philip Salter
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AS WELL as the devastating crash in equities, commodities have been hit hard by recent market turmoil. Both are driven by the public and private debt burdens on Western economies combined with declining expectations of the prospects for global growth. As such, the commodity currencies – seen by many as safe havens – have suffered a flight of capital and will continue to do so for the foreseeable future.

Chris Beauchamp of IG Index notes that the Australian and Canadian dollar are driven by raw materials, with declining copper and iron prices impacting heavily on the former and oil prices on the latter. Simon Smith of FxPro says over the past five years the Aussie and loonie have become increasingly correlated with global industrial production. Falling commodity prices are hitting the revenues of the key industries in these countries, slowing economic growth and increasing the potential for rate cuts. Smith says with rates at 4.75 per cent, the Aussie has been a favoured play on carry trades – a weakening economy will pressure the authorities to cut rates, further weakening the currency.

Unlike many macroeconomists, those at Societe Generale’s global strategy team have been ahead of the curve – envisaging the scenario of another downturn that most failed to even contemplate. Societe Generale’s Albert Edwards – famed for his thesis that global equities are in an “ice age” of declining valuations – remains bearish. He thinks: “The simple fact is that the global economy is falling back into recession – or indeed is already in recession.” And for those “hoping for emerging market growth to sustain the global economy,” he cautions that actually “emerging markets are slowing even more rapidly than developed markets.”

Phil McHugh of CurrenciesDirect points out that although the US dollar is still credited with a 60.7 per cent share of global currency reserves, it is in decline. However, he notes “there is no real current natural alternative that can cope with a large swing out of dollar, so the process is likely to take time.” McHugh though doesn’t consider the Australian and New Zealand dollars as safe havens and “would not recommend a move into commodity currencies – slowing growth from the US or China would ultimately lead to a sell off in commodity currencies.” Aaron Singh of IFX agrees, saying “the Aussie certainly cannot be called a safe haven after a near on 10 per cent drop in just one week,” adding “with the current rise in the volatility index, I wouldn’t be surprised to see even further commodity related sell offs.”

So which currency is the safest? Unlike the euro, the dollar will be around for a while yet – but the safest currency for now is the one that used to back the current flock of fiat ones: gold. A real safe haven.