Commodity currencies look ahead

CAD – The loonie took an ugly turn to the worst in H2 of last year on a combination of persistent downward revisions from the Bank of Canada and the appointment of Stephen Poloz as new central bank governor. Hailing from an export lobby background, Poloz wasted no time in making CAD-specific pronouncements, which were negative for the currency.  He said last month that loonie weakness was not being sufficient for Canadian exporters, leading to the interpretation that more weakness may be needed. Canada’s banks were known for the nation’s lucid home finance laws and avoidance of housing crash. But things are changing. The combination of slowing housing price growth (y/y house price growth at lowest in 4 years) and record high household/GDP ratio at 95% calls for the BoC to walk a very tightrope. With inflation below 1.0%, the BoC has leeway for further dovishness. All this explains the fact that Canada’s 10-year bond yields are no longer the highest in the G7 since mid-2012. We expect USDCAD to reach 1.1150 by end of Q2, followed by 1.1600 in Q4. GBPCAD is expected to follow higher near 1.9500 on diverging policy paths.

AUD–Aussie was the worst performing currency of 2013 behind the yen as the Reserve Bank of Australia’s Glenn Stevens single handedly talked down his nation’s currency in an onslaught of verbal interventions during Q4. Australia’s unemployment rate hit 4 ½ -year highs at 5.8%, prompting the RBA to slash rates to 50-year lows at 2.0%. The tapering of China’s growth rate from a 9-10% trajectory to 7-8%, as well as slashed profit prospects from the copper giants have also weighed on the Aussie. Weakness in copper and wheat prices will maintain the Aussie under wraps, especially as macro disappointment fails to rule out further RBA easing. Stating that the Aussie is near its cycle lows is quite one thing. Consolidating near those lows for 3 or 4 months is quite another. The combination of USD hawkishness and metals stagnation is likely to extend Aussie losses towards 0.8550.

NZD – The best performing currency tied to commodities in a negative year of commodities, the NZ dollar is also the only major currency, whose central bank is closest to raising rates. RBNZ president Wheeler said last month: “the key rate will probably need to rise by 225 basis points (2 ¼%) over the next 2 ¼ years”. Business confidence hit 20-year highs and house prices posted their biggest increase in 6 years. Most economists expect the RBNZ to raise rates from their 2.50% low by end of March. We expect the Fed January decision — whether to taper (due 1hour earlier than the RBNZ meeting) will be a major determinant of the RBNZ decision. If NZDUSD remains below 0.85 and the Fed carries out a January tapering, then we would anticipate a 25-bp rate hike, which would send the currency towards 0.89. More notable gains are seen against JPY and CAD at 95 and 0.94.

NOK- NOK’s was the 3^rd weakest currency in 2013, standing only ahead of AUD and JPY. Although the Norges central bank did not cut rates since March 2012, anticipation of an easing continued to spread amid slowing inflation and falling oil prices. December headline CPI slowed to 2.0% y/y by more than was anticipated from the central bank. All these factors added to prolonged slowdown in housing add to the argument of a March rate cut. But the Norges may consider waiting for the upcoming two CPI reports, which are due before the March 28 interest rate decision. With the low on rates standing at 1.25% (September 2009), it can be argued that that rates have to revisit the cycle low before stabilizing. This may argue for further gains in USDNOK and EURNOK towards 6.55 and 8.55 respectively.

MXN- After a positive 2012 and a lackluster 2013, Mexico’s  currency is being favoured by most LatAm traders ahead of the nation’s energy reforms and expectations of a recovery in its Northern neighbor. Amendments to the constitution will allow private companies to operate independently or partner with state oil giant Pemex via new types of contracts. This is expected to absorb fresh foreign capital into foreign direct investment—beyond simply hot capital flows. And once the Fed tapering becomes more priced in, this could cap the USD’s ascent–particularly against the peso—as Mexico’s 2014 GDP is seen more doubling to 3.5% from last year.

Energy– The 8% rise in WTI year-to-date, makes crude oil the 3^rd best performing commodity in 2013, behind natural gas and cotton. After 3 straight monthly declines due to supply issues emerging from stabilizing diplomatic relations between the West and Iran and tempering of Syria tensions, oil has staged a sharp rally in December. Further gains past the $100 level, will likely face resistance near $103, before a gradual resumption back to $95.00. The question for OPEC is whether the cartel will succeed in agreeing over restricting output to support prices. But increased supply, stable geopolitical conditions and a doubtful economic conditions are anticipated to impose a cap near $105.

Gold – Gold’s may see further downside after its first annual decline since 2000. It is time we looked at why the Federal Reserve will keep rates low beyond 2014 rather than the consequences of such policy. The disinflationary risks to the global economy are likely to add to negativity in metals. Intermittent rebounds are possible in gold, but 1300 shall remain capped before 1100 is to be retested.

One indicator serving as a proxy for gold is the gold/miners ratio (metal/goldbugs ratio). As gold bugs begin to outperform the metal’s spot price via more rapid appreciation, then we would expect this to be a positive for the yellow metal. Going forward, gold bulls ought to watch for a break above the 220 in the gold bugs index in order for spot gold to transition from stabilization to upward direction.

Copper – Copper has outperformed precious metals partly due to issues with declining stocks, improving prospects for global economic demand and at the same time, falling oil prices. Although copper has declined 9% year-to-date, it is less negative than the -28% for gold, 36% for silver and 15% for aluminum. Medium term prospects for copper suggest prices will stage a temporary rally towards $7500/mt before fading lower to $7000/mt.