THE newest trend is the emergence of the commodity dollars as a safe haven trade. With US debt ceiling issues still unresolved as the clock ticks away on the 2 August deadline, the dollar continues to weaken against the standard risk aversion currencies such as the Swissie and the yen. As a matter of fact, dollar-Swiss franc set a fresh record low below the SFr0.8000 mark in yesterday’s trade after President Obama addressed the nation lamenting the lack of a deal with Republicans.
Swissie strength is to be expected during times of stress in global capital markets. However, few traders anticipated that the Australian and the Canadian dollars would rally as well. The commodity currencies are generally associated with risk appetite. When equity markets rally and investors are feeling bullish, high yielding commodity currencies which act as a proxy for global growth tend to rise.
Yet at the start of this week, when equity markets wobbled under the uncertainty of the developments in Washington DC, the commodity dollar held firm, with the Aussie now trading within striking distance of all time highs above the $1.1000 figure. In an era of burgeoning budget deficits on both sides of the Atlantic, the solid finances of Australia and Canada are beginning to look like a much safer bet.
While the Eurozone and the US struggle to get control over their fiscal budgets, the sovereign bonds of Australia and Canada remain solid AAA investments. Indeed, many analysts now predict that even if the US is able to avoid a technical default, its AAA credit standing may come under review. Under those conditions, the Aussie looks increasingly attractive, even if global growth slows into the second half of this year. If US lawmakers fail to reach an agreement before the end of this week, Aussie dollar-dollar could challenge its previous high.