Mixed fortunes for the dollar block currencies - Natixis
Analysts at Natixis explain that with the US dollar on the back foot during the first quarter, the Australian, New Zealand and Canadian dollars, three commodity currencies, all appreciated and given that the US dollar and commodity prices (notably the price of crude) are expected to firm slightly, commodity currencies will remain relatively stable in coming months.
Key Quotes
“The Australian dollar recorded the sharpest increase in the first quarter, buoyed by the rebound in iron ore prices to a high of $95/t and by the stronger growth recorded by the Australian economy. Volatility having subsided, this also bolstered the Australian dollar, the currency then benefiting from carry trade strategies. In this context, the Reserve Bank of Australia maintained a neutral stance. While growth is picking up, inflation remains low. However, the central bank has stressed risks linked to the property market and to the level of household debt, which suggests that it could maintain the monetary status quo for quite some time. As regards the Australian dollar, it can be expected to track closely iron ore prices, which look set for a correction given the significant inventory levels and China’s determination to reduce excess capacity in the construction sector.”
“The Canadian dollar recorded the weakest appreciation against the US dollar. The USD/CAD fluctuated between 1.30 and 1.35, the pair testing the lower bound during the US dollar’s bout of weakness at the start of the first quarter, before recovering towards 1.35 when crude oil prices weakened to $50/bbl. While growth has picked up to reach 2.6% in the fourth quarter of 2016, the dovish tone of the Bank of Canada weighed on the Canadian dollar given the divergence of interest rates between the US and Canada. In the short term, the trajectory of crude oil prices will be crucial given the risk of a correction in reaction to the higher-than-expected US production and the very long speculative positions. In the second half of 2017, we still expect a rebound in the price of Brent back above $60/bbl, spurred by an increase in global demand. The divergence in the monetary policies of the Federal Reserve and Bank of Canada, which continues to err on the side of caution, will limit any significant rebound by the Canadian dollar. Under these conditions, we see the USD/CAD being relatively stable around 1.34.”
“The New Zealand dollar appreciated slightly against the US dollar in the first quarter. This appreciation was limited, however, by the still dovish stance of the Reserve Bank of New Zealand, motivated by the sluggish economic growth and by the low inflation. The correction in dairy product prices in March also limited the rebound of the New Zealand dollar. In coming months, the overvaluation of the New Zealand dollar in terms of its real effective exchange rate along with what is weak growth and inflation will likely contribute to a prolonged monetary status quo on the part of the central bank. Under these conditions, we see the NZD/USD correcting towards 0.68 at the end of the year, mainly because of the stronger US dollar.”