Commodity Currencies Under Pressure

A double whammy of negative news is hitting commodity currencies today and triggering sour forecasts from Forex traders and economists towards the future.  First up was the release of MPC Minutes from the Reserve Bank of Australia.  The report showed that the central bank will be holding interest rates unchanged for the next few months.  Later in the day were reports that China’s growth is in fact slowing which will decrease demand for commodities.

As such, after a great start for 2012, the Aussie, Kiwi, and Loonie could experience selling pressure, even as these currencies offer higher interest rates in comparison to the safe haven dollar and yen.  Currently, the AUDUSD is lower by almost 100 pips to 1.0485 since yesterday afternoon.  

A greater review from Reuters about today’s selling pressure:

The growth-linked Australian and New Zealand dollars may lose their shine in coming months as central banks that have poured billions into their economies and kept interest rates ultra-low pause to assess the impact.

These currencies have had a good start to 2012 as have riskier assets like stocks and commodities, with which they tend to move in tandem as the economic outlook improves, but analysts say they will struggle to advance further as policymakers consider whether more stimulus is necessary.

Signs of slowdown in China, a major market for Australia's natural resources, may deal an extra blow to the Aussie.

Shares, commodities and higher-yielding currencies have rallied in the past two months, supported by pledges to keep interest rates near zero in much of the developed world to aid economic recovery. On top of that, investors have put some of the billions of dollars created through monetary stimulus into these assets.

But this central bank largesse may have reached its limit.

"The Australian dollar and to a lesser extent the New Zealand dollar would come under pressure in the months ahead as we think major central banks will be a bit more reluctant in pumping in more funds," said Ian Stannard, head of European FX strategy at Morgan Stanley.
The European Central Bank injected nearly a trillion euros into the banking system via cheap long-term loans in December and last month, the Bank of Japan decided in February to print more money as did the Bank of England while the U.S. Federal Reserve pledged to keep rates near zero until 2014.   Read More