The turn in commodity currencies

While some have been arguing the end of the carry trade, the real end-game in currency trading is the commodity run. Three currencies which have seen some of the biggest reversals are AUD, NZD and CAD all of which are key commodity currencies. NOK and ZAR have also seen big reversals since the beginning of the month. It happens that these currencies have had higher interest rates than the US which made them likely carry currencies but the driver is more the price of oil as the terms of trade adjust rapidly to the change in crude oil prices.

Canada has been hit with the combination of lower energy prices and the close ties to the US economy. More exports are in the manufacturing sector especially in auto parts, so the slowdown in the US auto industry has hit the CAD hard once the benefit of high crude was taken away. Once the benefit of high commodity price was taken away, Australia was also hit hard. There was little benefit in the metals area with the slowdown in economic growth in China. Even a relatively strong economy like Norway has seen a sizable reversal. There is little chance we will see these currencies reach their pre-July levels anytime soon so we should get used to the new trading levels.