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Commodity Currencies

Commodity Currencies

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Published by: daytrading on Jul 16, 2008
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Commodity Currencies and Global Growth
By Cornelius Luca,
GFT Analyst
2008
 
Global Forex Trading | Division of Global Futures & Forex, Ltd.
WWW.GFTFOREX.COM
2
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 The fasT-paCed
industrialization of China, which only became
obvious to the untrained eye within the past few years, has had
an enormous impact on economies around the world. But to forex traders, what is more important is that this historical development
led to strong trends and unprecedented growth in the global currency
markets.
According to the most recent gures released by the BIS, the daily
 turnover in the currency markets exploded to a staggering $3.2
 trillion dollars a day in 2007, nearly double the daily turnover only three years ago.
With this growing market, the FX community has nally embraced the
potential of emerging currencies, with 20 percent of currency trades
estimated to include emerging currencies. Taking into account that
 this is part of a growing trend of emerging currencies, GFT expanded
its forex trading to include more than 120 currency pairs.
What’s even more amazing is that the country that started it all,
China, doesn’t actually have a free-oating currency — yet.
The Need for Commodity Currencies
The multi-faceted growth of China could not exist without Australia’s
gold, coal, bauxite, copper, lead and zinc; New Zealand’s wool; and
Canada’s gold, other metals and natural gas. This propelled the CRB
Index, which serves as a widely recognized benchmark for the global
commodities markets, to new highs in late 2007.
This demand for commodities and the incredibly fast-pacedconstruction in China will likely continue unabated. This means
 that the Australian, New Zealand and Canadian dollars will have nochoice but to march higher at the tune of China’s music.
Grouping Currencies
Traders often group currencies in simple ways, such as geographically,
by level of economic strength, or by what their country exports. If you follow the rst route in the order of the global day, you will get
 the Asian block, the European block and the American block. Thiscategorization will likely not yield good results. The correlations within the Asian block are low, with the yen often following different patterns
and trends than Singapore or Taiwan.
All Commodity Currencies Were Not CreatedEqually
Commodity currencies include those from Australia, Canada and
New Zealand. But these countries are different as well; not only do they produce and export diverse commodities, but they also havevastly different geographic locations, asymmetrical economies and
dissimilar interest rates. These commodities may be strong and may
remain strong, but they will likely advance at different paces.
   (   $    b   i   l   l   i  o  n   )
1989 1992 1995 1998 2001 2004 20070500100015002000250030003500
Figure 1.
The daily turnover exploded to a staggering $3.2 trillion dollars a day by 2007.
Source: BIS.
Geographically speaking, Australia and New Zealand are
closer to China than to the United States, which makes it
naturally easy to export commodities. While the entire world
wants to own a piece of Canada, its proximity to the United
States roughly translates into 87 percent of Canada’s exportsgoing to the United States, and approximately more than half 
of these were metals, natural gasses and others.
What does this mean? If the U.S. economy slows down to
recessionary levels in the wake of the sub prime debacle, its
consumption will decrease, which will also decrease Canadian
exports. This would hurt the Canadian dollar, though this isall relative, given that the loonie was hovering at around a31-year high against the greenback.
None of these three commodity-exporting nations have
large populations; Australia has about 20.4 million people,Canada has around 33.4 million and New Zealand only 4.1
million people. It is easier to have strong economies with
fewer people, but this doesn’t guarantee success.
 
1.002.003.004.005.006.007.008.009.00
2000 2001 2002 2003 2004 2005 2006 2007
Interest Rates in Canada, Australia and New Zealand
CanadaAustraliaNew Zealand
Figure 2.
The interest rates of the major commodityexporting economies.
 
Global Forex Trading | Division of Global Futures & Forex, Ltd.
WWW.GFTFOREX.COM
3
Cmmdty Cc d Gb Gwth
New Zealand had an annual account decit of $13.6 billion at the
end of the rst half of 2007. This is despite rising prices from exports
of butter and milk, and record-high interest rates that have sloweddemand for imports.While Canada’s economy will always be vulnerable to weakness in
 the United States, it also had an exceptional year in 2006, whenit surpassed all other Group of Seven countries, according to BMO
Nesbitt Burns. Canada’s economy had a great mix of fundamentals,
including ination and unemployment rates, budget and current
account balances. No other Group of Seven country had a budget
surplus in 2006, and only Germany and Japan have current account
surpluses.
Demand for Commodity Currencies
Interest rates have played a signicant role in the demand for the
commodity currencies, producing spectacular results for carry trades,
but that was only one of the factors in the demand. That’s because
New Zealand had an interest rate of 8.25 percent and Australia had
one of 6.5 percent, while Canada’s borrowing costs were only 4.50
percent by late 2007. The Fed funds rates were 4.75 percent, so the
interest rates were only one factor. And that’s where the Chinesedemand for commodities came into play.
While the Australian dollar surged to an 18.5-year high by the end of 
September 2007, it now has reached an all-time 25-year high.
The New Zealand dollar lagged in its recovery because the economic
fundamentals were weaker than those of Australia and Canada.
If you look at the cross between the Australian and New Zealand
currencies, the difference in their recovery is quite dramatic. Following 
 the double bottom in July, the AUD/NZD cross rallied for seven
consecutive weeks before pulling back for two weeks. While choppy,
 the uptrend was quite pleasing.
Meanwhile, the USD/CAD provided an excellent example of conuence
between technical and fundamental factors. The demand for the richcommodities of Canada’s strong economy was complemented by clear
 technical signals even on a grand scale. After a double-top formedbetween 2001 and 2003, there has been no looking back. Three
bearish ags followed, and then there were two clear breakouts in the
1.2800 and 1.1000 areas. In both cases, the subsequent bounces
failed to surpass the breakout points. Given the magnitude of the
monthly chart, day traders should have had much more condencein their long-term, short dollar/Canada positions.
Appetite for Risk
Figure 5.
The AUD/NZD rally shows the difference in the
recovery of its components.
Figure 4.
The New Zealand dollar lagged in its recoverybecause the economics fundamentals were weaker than those of Australia and Canada.
Figure 3.
The Australian dollar surged to a 25-year high
against the US dollar on February 28, 2008.

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