Watching Commodity Currencies – What Can Be Learned

It’s pretty common knowledge that the currencies of countries with “commodity related economies” such as Australia, New Zealand and Canada are seen as the “darlings of the currency markets” during times when investors feel safe.

Simply put, large institutional investors are able to borrow money such as U.S Dollars or Japanese Yen at extremely low rates of interest, then use these funds to invest in currencies / countries where higher yields and greater opportunities can be found. Australia with its mining / gold related businesses, as well Canada with its oil as a couple of good examples.

The trouble is, as attractive as some of these investment’s may appear during times of economic expansion and loose monetary policy ( with both The Fed and The Bank of Japan flooding the planet with cheap money ) the currencies of these commodity related economies are not widely held, lack liquidity and are not generally sought during times of contraction and tightening.

To a certain extent you can almost consider them the Twitters and Facebooks of the currency markets. Relatively large, fast moves higher when times are good and investors feel safe – but equally the opposite movement when things start to go south.

Think of it like this. If suddenly the world fell into chaos and you were trapped on holidays in The Caymens, unable to return home to your family and friends. What currencies would you look to have there in your pocket / bank account? A handful of Aussie Dollars likely won’t do the trick.

So what can be learned by following these currencies? Can they give you any indication of future movements in global appetite for risk?

Lets have a look.

Australian_Dollar_During_Risk_Aversion

Australian_Dollar_During_Risk_Aversion

As an extreme example we can see prior to the crash of 2008 that the Australian Dollar had enjoyed a fantastic run while times where good – only to then wipe out six years of gains in a matter of months. Commodity related currencies across the board got completely hammered as fearful investors did all they could to get back to the “relative safety” of the currencies originally borrowed – those being the U.S Dollar and Japanese Yen.

Since Central Banks have been printing money like mad since 2009 investors have enjoyed nearly 6 years of bliss, borrowing said funds at extremely low rates of interest and investing where yields can be found.

I’m not suggesting you’ll see another 2008 scenario play out tomorrow, but by keeping an eye on the commodity currencies you may certainly get a bit of lead time – should things turn.

6 Responses

  1. Joe July 28, 2014 / 2:46 pm

    Kong,
    AUDUSD refuses to go down even with equities looking a bit weak! If it doesn’t correct this week it will probably blow through .95 and run to .98…. but you’re still going to hold short through such a run??

    I think your fundies make a lot of sense but I’m sure you also trade on technicals too and it doesn’t show weakness in AUD at all. And as you suggest, another crash on the horizon is unlikely so trying to understand why you are in a position based on such a fundie thesis?

    • Forex Kong July 28, 2014 / 3:10 pm

      Nothing else has moved today either as markets are at a stand still till GDP data and Fed speak Wednesday.

      Please appreciate that AUD hasn’t moved more than a couple pennies in 5 months so…..anyone who may have entered “Long” during the same time period would be haggling with the same question of future direction.

      No one wins when a given assets trades sideways for 5 straight months. Agreed?

  2. David July 28, 2014 / 3:43 pm

    In this scenario Longs would win with Yield taken into account. That’s a ton of yield!

    With that said, I’ve been biased to the downside like yourself and have been adding little bits here and there and closing them out for a few pips here and there. The Yield’s not working as bad against me this way, but it is frustrating nonetheless. GBP/AUD longs have been paying off at least, as I know you’ve played that pair a few times over the last few months and made some good calls on when to get long on it.

    • Forex Kong July 28, 2014 / 7:56 pm

      Hey David. It’s frustrating for sure as this has been an incredibly long and drawn out time of consolidation / sideways trading – especially in such a “high octane currency” like AUD!

      I’ve traded it for years and have had “so many winners” with respect to it moving huge…..yet these days – not.

      It’s telling though as…if risk was just “shooting for the moon” AUD would be well up near it’s highs around 108!

      In my view it’s putting in a “lower high” here in this area ( how ever long it takes ) and the big boys obviously know it.

  3. Jworthy July 29, 2014 / 7:09 pm

    Hey Kong – hope you’re having a great summer.

    This is not the first time you talked about commodity currencies and risk appetite. And because of one of your earlier posts, I have been converting a large amount of CAD to USD over the last month or so. I was a little nervous as it kept dripping lower but these moves the last couple days have been quite impressive and are making a very material difference. So thank you for the point in the right direction!

    I guess I’ll expect a bit of a pause in USD/CAD now that we’re running in to prior support. But I will be very curious to see if this thing can keep moving…. Cue tomorrow’s US GDP report?

    Thanks again for sharing your thinking!
    J

    • Forex Kong July 29, 2014 / 7:15 pm

      There’s alot riding on tomorrows report yes so….stay alert.

      I too feel USD/CAD should take a short term break here, and likely provide for new entry “long” just a bit lower.

      Uptrend looks pretty good but we are certainly a touch extended here.

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