Commodity currencies are in an interesting position at the moment.
The US dollar is falling on several fronts as the market reconsiders the path of the Federal Reserve’s money. But they are reconsidering that because of slowing growth and inflation.
Prices are also relatively high in the commodity bloc, currently at:
- 4.50% in Canada
- 4.35% in Australia
- 5.50% in New Zealand
The question is: If the Fed starts cutting interest rates sharply, will other central banks follow suit with similar cuts?
In the case of Canada, I think this argument is particularly compelling. Interest rates in Canada are hitting hard, the housing market is floundering, the Bank of Canada has already cut rates by 50 basis points, and I can see the need to get to 2% quickly.
There are also indirect impacts on things like commodities, with today’s $3 drop in Brent crude highlighting the risks facing commodity producers.
Brent daily
Currently, the USD/CAD pair is trapped in a headwind trap for the USD. I believe that as this storm subsides and concerns about the global economy increase, the USD is expected to become a safe haven (along with the Japanese Yen and the Swiss Franc).
It becomes even more convincing when you look at the USD/CAD chart because the pair could break three highs over the past two years, paving the way to 1.40 and beyond.
USD/CAD Weekly