Commodity exporters remain accommodative

Commodity currencies (AUD, CAD, NOK and NZD) have come under renewed pressure in 2016 as fresh declines in the oil price have raised the expectations of further interest cuts by respective central banks. Global oil prices have plumbed twelve year lows following the removal of Iranian nuclear sanctions and the release of weak Chinese manufacturing data, all of which have promoted bearish sentiment towards the broader commodity complex. In the very near term, we expect the AUD, CAD, NOK and NZD to resume their decline against the US Dollar, as bearish sentiment lingers and expectations of continued rate divergence with the US build.

Both Australia and New Zealand have suffered as their respective terms of trade (value of exports/value of imports) have plunged in the face of commodity oversupply and reduced Chinese demand. Last year, the Reserve Bank of Australia (RBA) cut rates twice in order to negate the economic impact of reduced capital expenditure and job reductions in the nation’s mining sector. Meanwhile, the Reserve Bank of New Zealand (RBNZ) cut rates 4 times to prevent the deflationary impact of supressed dairy farming incomes. Since mid-December, the start of oil’s recent drop, market expectations of further interest rate cuts have resurfaced (see Figure 1), with the RBA and RBNZ expected to cut rates at their upcoming monetary meetings on the 29th February and 27th January respectively. We believe that both the AUD/ USD and NZD/ USD exchange rates will come under pressure in coming weeks, as expectations of rate divergence with the US and concerns over the ongoing impact of commodity declines continue to weigh in.

The Bank of Canada (BoC) kept rates on hold at its latest monetary policy meeting this week. This was despite its latest quarterly monetary policy report revealing reduced growth forecasts and concerns over the “complex adjustment” the economy continues to make from its resource to its non-resource sector. This decision to hold off was likely due to the BoC awaiting the release of the newly elected government’s federal budget, which is likely to include additional fiscal stimulus. We still believe that the BoC may be encouraged to take further action in months to come and the USD/CAD will move higher as a result. This move will also be aided by the build-up of net short CAD speculative positioning to record levels (see Figure 2).

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