rahul.khanna's picture

What factors will drive the commodity bloc currencies as US draws liquidity?

Commodity bloc currencies have declined versus USD since July, but the fall has been fairly sharp since 4th September, with AUD, NZD having dropped almost 6%, well above others currencies. CAD has been an exception falling only 2.5% despite commodity markets remaining considerably weak, this is due to improving fundamentals and less dovish stance from BOC. 

Going forward, we see CAD outperforming in commodity bloc versus funding currencies (EUR & JPY) as domestic picture improves, and US economy rallies.  AUD & NZD will likely remain weak and there will be opportunities for selling in to rallies.  AUD will weaken the most due to uncertain data out of China, weak domestic outlook and falling commodities prices, especially iron ore & gold. NZD will also remain weak, especially vs USD given RBNZ governor Wheeler has reiterated an overvalued currency.  However, with a positive risk-adjusted carry, we see it strengthening versus funding currencies as it looks oversold. AUDNZD should also weaken from current levels on the back of expected rate differential.

(Click on the chart to enlarge)

Technically also, commodity bloc currencies looks set to weaken further versus USD and we recommend selling into rallies. AUDNZD remains an exception where technical & fundamental outlook don't concur, looking bullish from a technical point of view.