Forex Investment and Currency Trading

The cyclical downturn in the global economy and the associated slide in commodity prices have triggered a powerful retreat in the so-called “commodity currencies” such as the Australian (AUD), New Zealand (NZD) and Canadian dollars (CAD). Whilst the set-back for these currencies has been abrupt, many remain significantly overvalued on standard Purchasing Power Parity (PPP) and Real Effective Exchange Rate (REER) methodology. The OECD has PPP-based “fair value” as of the end of 2007 for AUS-USD, NZD-USD and USD-CAD at 0.70, 0.65 and 1.22 respectively, suggesting these currencies have some ways to go before stabilizing. AUD-USD is now –14% from its highs and –5% on the year, but it is still trading +21% above its 10-year average. Near term, there is still plen1ty of downside if the powerful commodity bear market of the late 1990s were to be repeated here. This is not to suggest it will. On balance, a more measured approach is warranted this time, but it is important to consider the risks. Moreover, central banks have now begun easing cycles, undercutting the carry argument of owning these currencies. Into H1-09, commodity currencies will face tough headwinds – and not just in the “majors”. In the commodity prices, which in turn has been led by Asian demand. This resulted in a significant terms of trade boost and real appreciation of these currencies. However, as Asia and specifically China slow, so markets will anticipate slowing commodity demand. In turn, this will lead to investors reducing their exposure to commodity currencies in EM as well as in the “majors”. Companies would do well to consider in this context currencies such as the Brazilian real (BRL), Chilean Peso (CLP), Colombian Peso (COP), Mexican peso (MXN), Russian rouble (RUB), Malaysian ringgit (MYR), GCC and much of Africa.