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Thursday, March 13, 2003

Commodity Currencies Up or Down?

This one is for Chris in Australia, who tells me that over there they got of the back of the sheep at the end of the 19th century - but you're still a commodities dependent economy, right. Or do they have it wrong at the FT. And for John in Canada, thanks.

Risk aversion appears to be sapping the strength of the "commodity currencies", which have been among the best-performing of the year. The Australian dollar, which reached a 49-month high of US$0.617 this month, was at US$0.594 on Wednesday while its New Zealand counterpart was at US$0.548, down from a 46-month high at US$0.566. With interest rates at 4.75 per cent in Australia and 5.75 per cent in New Zealand, the currencies had benefited from investor appetite for higher yields but, said Michael Metcalfe at State Street Bank, that is waning. "Our risk appetite indicator has been in risk-neutral territory for seven consecutive days and the correlation between currency performance and yield has turned negative for the first time since September," said Mr Metcalfe, who added that a further rise in risk aversion could send the pair lower still."Judging by their correlation with risk appetite in the past 12 months, the Australian and New Zealand dollars would be the most vulnerable major currencies." Liquidity is also an issue, said HSBC's Marc Chandler. "Some players are apparently concerned that as the prospects of war draw closer, the liquidity in these currencies is likely to suffer and have been inclined to book some substantial profits," he said. "Some of these longs were so extended we'd already have had a pull-back if it wasn't for the war jitters," added Meg Browne, his colleague.The Canadian dollar, also nominally a "commodity currency", tracked the move lower, but analysts believed strong economic fundamentals and expectations of further rate rises would continue to support it.
Source: Financial Times

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