G10 commodity currencies have performed poorly – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that along with the USD, the G10 commodity currencies have been the worst performers within their peer group this year. 

Key Quotes

“For the USD, disappointment about the lack of progress in Trump’s domestic tax and reform agenda have triggered the declines. Trade concerns and the soggy oil price have weighed on the loonie with the latter also impacting the NOK.  For the AUD, a sharp drop in the price of iron ore has been a hindrance.  In turn this is linked with concerns about the outlook for the Chinese economy.  While both the RBA and the RBNZ have expressed caution with respect to China, the New Zealand economy currently appears to have been dealt a better hand.” 

“The soft performance of the G10 commodity currencies seems to be out of kilter with this year’s improvement in levels of economic activity.  Strong world growth generally bodes well for demand for energy, metals and food.  In the year to date, global growth has outstripped the expectations of many commentators.  In April the IMF ratcheted up its world growth forecast to 2.0%, the World Bank had already pushed its forecast higher in January.  Stronger than expected levels of economic activity in Japan, Europe and China in the initial months of the year have been instrumental in buoying global growth.  This backdrop, mixed with the plentiful supply of cheap money, has drawn a flood of funds into emerging markets and other risky assets this year.  Traditionally, this is a backdrop that is supportive for commodity prices and for commodity related currencies.  However, this has not been the case for the CAD, NZD, NOK and AUD this year.  While the failure of the oil price to hold at higher levels offers a part explanation.  Rising concerns about the Chinese growth outlook have played on the AUD in particular.” 

“As the world’s largest consumer of commodities, Chinese demand plays a key part in the determination of the price of many raw materials.  Despite good levels of growth so far this year, there is a clear degree of caution in the market regarding the outlook for the Chinese economy going forward.  For the past four years we have argued that Chinese growth has become too dependent on unsustainable and unproductive borrowing.  During this time China has not been adverse to attempts to de-lever.  In April liquidity was again tightened.   The authorities have also encouraged a switching in the nature of the debt.  After the economy started to slow in 2014, access to home loans was eased resulting in a sharp build-up of household debt.  Although household debt levels relative to income are less than in many developed countries, consumers are still more vulnerable to any slowdown in income growth.  This factor combined with the ageing demographic provides risks to consumption growth.”