Special Report on Commodity Currencies

Mr. Vikram Murarka, Chief Currency Strategist, Kshitij Consultancy

EXECUTIVE SUMMARY:

We are bearish on the Dollar Index and bullish on Crude for the next few months. This makes us bullish on the Commodity Currencies; given the strong correlation these currencies share with these two variables.

INTRODUCTION:

A commodity currency is the currency of a country which depends heavily on the export of certain commodities or raw materials for income. Commodity currencies generally refer to the Australian Dollar, Canadian Dollar, New Zealand Dollar, South African Rand and Brazilian Real etc.

Naturally the economic exposures of the these countries in the global sphere is larger compared to the other more or less self-sufficient countries, resulting in a much greater impact of the volatility in the commodities exported on their GDP and currencies.

The table alongside (data courtesy World Bank) shows the increasing dependence on exports for Australia, Brazil, Canada and New Zealand.The figure for 2014 would have been higher for all the countries if almost all of them were not still trapped in a web of recession triggered by the financial meltdown of 2008 and a huge bear market in commodities since 2011.



The weakness of the commodities affected the economies and then propagated to the currencies. As we see, most of them are in a fragile state but there may be a faint ray light at the end of the tunnel as commodities begin to recover and can even strengthen.

Correlation between Dollar Index and Commodity Currencies

The above chart compares the percentage change in the Dollar Index and in the commodity currencies (BRL, RUB and CAD being inversed). Although the Dollar Index is heavily influenced by Euro and Yen, this chart shows how strongly the Commodity currencies follow the cues from the Dollar Index. The deep interconnection between the Dollar and commodities influences the economics of the commodity countries to a very large extent and it is reflected in the appreciation/depreciation of their currencies.








Correlation between Brent Crude and Commodity Currencies

Among all the commodities exported by these countries, Crude oil is undoubtedly the most significant. Volatility in oil prices makes everyone anxious but economies like Russia, Canada or Brazil depend a lot more on it and suffer far more than other economies when oil price crashes down, as it did in 2014-15. The chart above shows the strong direct correlation between Brent Crude and the commodity currencies and hence, a bottom in Crude proposes a strong case for a bottom for these currencies too.
Looking at the following charts, we are bearish on the Dollar Index and bullish on Crude for the next few months. This makes us bullish on the Commodity Currencies, which is reflected in the forecast table at the end of this article.



 

Brent Crude Projection
Over the last couple of years, a global supply glut, monstrous in dimensions, pushed Crude vertically down from $115 to $27, prices that had been last seen a decade back. We believe the selling has been overdone for now and the current bounce from $27 may extend all the way to $60 before another down leg reasserts itself.

The expected price activity is shown on the chart, inside the coloured box which projects a steady rise to $60 in the next 2-3 quarters, a view we have been holding since the beginning of 2016.

Forecast Table
Based on (a) our bearishness on the Dollar Index, (b) our bullishness on Brent Crude and (c) the strong correlation between these two variables and the Commodity Currencies, we would expect the Commodity Currencies to strengthen in the coming months.

Our 3-month and 6-month projections

The table above shows the projected values for the Commodity currency pairs for the next 3 and 6 months. The currencies are expected to gain strength against Dollar in the coming months as we believe Dollar Index may have made a long term top and might probably have entered a bear market. Occasional bounces of Dollar against the currencies will be seen but those bounces are expected to be used to add Dollar shorts by the market participants.
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About Kshitij: Kshitij is one of the most well recognized names in the Foreign Exchange market, both in India and now with Bloomberg ranking us No.1 Forex Advisor and Forecaster (for our Dec 15 forecasts), globally too.

Kshitij is serving its clients for 20 long years with many more decades to come in this pursuit of excellence and reliability. We are probably the only company in India with a 10-year long track record. We specialize in Long term forecast of currencies, especially Dollar-Rupee but on demand, even exotic currencies. Our advice in the Forex Risk Management is valued widely by our esteemed clients.
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Disclaimer: The above views are based on the latest available information. Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. While the views are proffered with the best of intentions, neither the author, nor the firm are liable for any losses that may occur as a result of any action based on the above. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved. Past performance is not necessarily an indicator of future performance.
 

 

Disclaimer: Views are personal and not
the views of the publisher.