Forex News: Commodity Currencies Face Fresh Barriers

Many analysts now feel that commodity currencies risk becoming victims of their own success as this year’s rally has made them increasingly dependent on continuous economic upside surprises to drive them beyond key technical barriers. A move by China to let the Yuan appreciate may also knock these high yielding currencies if it triggers a wave of risk aversion.

The Canadian, Australian and New Zealand dollars have all rallied on the international financial (forex) market in recent weeks. They have been buoyed up by strong economic fundamentals, continuing Chinese demand for commodity exports from all three countries and the prospect of rising domestic interest rates. The rally has brought the Australian and Canadian Dollars, in particular, close to key technical levels beyond which they may now struggle to advance, increasing the risks of a correction.

“Ultimately the forces underpinning the CAD, the Aussie and the Kiwi are not going to change that much and these trends are going to continue into more and more overvalued territory,” said Neil Mellor, currency strategist at Bank of New York Mellon. “Some very nervous investors could look to take profit and it will get quite choppy,” he said, adding that the recent rise in the number of speculators favoring these currencies also left scope for a pullback.

There are signs all three are struggling to make headway. The Canadian Dollar has failed to stay above parity with the US Dollar after breaking through that level last week. On Friday the release of weaker than expected jobs data sparked a sudden fall in the value of the currency, highlighting vulnerability at these levels.

Also last week the Australian Dollar reached a five month high of USD 0.9389 but is now struggling to break through its 2009 high of USD0.9407, especially following the release of Monday’s disappointing housing data. A series of interest rate increases have allowed the currency to appreciate this year, but if other central banks were to start lifting rates this would cut the currencies yield and diminish its market appeal.

Both Canada and New Zealand are expected to raise interest rates in the third quarter; this is also when market analysts feel the US Federal Reserve will move on increasing interest rates.

Now any move by China to revalue the Yuan — which many in the market expect soon — could trigger a knee-jerk negative reaction for commodity currencies as investors feel this could dent risk appetite and weigh on Chinese demand for commodities. “If China allows a significant Yuan appreciation, the Australian and New Zealand dollars would likely be the biggest losers in the G10,” Barclays Capital said in a note to clients.