Analysis: Growth slowdown fears temper bullishness on commodity currencies

Brazilian Actual and U.S. greenback notes are pictured at a foreign money alternate workplace in Rio de Janeiro, Brazil, on this September 10, 2015 photograph illustration. REUTERS/Ricardo Moraes/File Picture

LONDON, April 21 (Reuters) – After large rallies fed by blockbuster commodity value surges, the tide could also be turning for currencies such because the Aussie greenback and Colombian peso as fears of a world progress slowdown take maintain in markets.

As inflation and better borrowing prices crimp enterprise and shopper spending, the Worldwide Financial Fund and World Financial institution this week slashed international progress forecasts by almost a share level and flagged the chance of additional drops stemming from China’s COVID lockdowns and sanctions on Russia learn extra .

The warnings knocked costs of oil and metals, although tight provide of most commodities has thus far capped losses. Brent crude futures stay above $100 a barrel whereas the Refinitiv CRB commodity index remains to be up almost 1 / 4 this 12 months (.SNCMP).

Eight of the highest 30 foreign money performers this 12 months in a gaggle monitored by Societe Generale are commodity-linked. In a smaller G10 grouping, 4 of the highest 5 are from commodity exporting international locations, Refinitiv knowledge exhibits.

Societe Generale strategist Kenneth Broux reckons nonetheless, that the rally is “working on fumes” with an enormous take a look at for commodity currencies coming from U.S. actual yields – or inflation-adjusted 10-year Treasury yields – turning constructive this week for the primary time in two years.

Central banks are additionally sharpening their hawkish credentials, particularly the U.S. Federal Reserve.

A BofA investor survey this week predicted the Fed would hike charges greater than seven instances this 12 months, up from 4 instances in a March survey.

Anticipation of the ensuing progress slowdown could also be already taking the sting off commodities and commodity currencies such because the Australian greenback, which rose 10% versus the dollar between end-January and late-March.

The Brazilian actual has gained 18% this 12 months and the Colombian peso 8% .

“Lengthy Latin American power exporters and quick Asian importers” has been this 12 months’s most concentrated international alternate commerce, the top of a U.S. financial institution’s foreign money desk stated.

April has introduced a turnaround, nonetheless. The Chilean peso for instance, has shed virtually half its first-quarter features as copper costs ease, whereas indicators of a Chinese language slowdown have weighed on the Aussie and Kiwi {dollars}.

Morgan Stanley’s proprietary FX positioning tracker, calculated off consumer possibility market positions, displays the shift, stated James Lord, the financial institution’s international head of international alternate.

“Normally alternate charges are usually very correlated and have a tendency to go in the identical path, however we’ve got seen an enormous decoupling between commodity exporting and importing currencies because the begin of the 12 months,” Lord stated.

On Morgan Stanley’s scale of minus 100 to plus 100, the place 0 is impartial, positioning on commodity currencies reached 75 in March, the best in keeping with knowledge going again to 2014. The rating has since eased, albeit to a still-bullish 62.

“Commodity exporters’ currencies could begin to weaken from right here as a result of international progress is slowing,” Lord stated, noting that excessive positioning means there have been “quite a lot of flows that may go the opposite approach”.

The catalyst might be China.

The yuan, essential to the trajectory of commodities, has fallen to a two-month low in opposition to a basket of currencies .

With swathes of China beneath COVID lockdowns, a gauge of hedge fund positioning compiled by the U.S. CFTC exhibits a pointy decline in Aussie greenback internet longs – presently $2.1 billion versus six-year highs of about $6.5 billion in January .

Brazilian actual internet longs have held up higher, although they too are off early March’s document highs of almost $1 billion . Hedge funds have additionally stopped shopping for the kiwi and the Canadian greenback, the information exhibits , .

If progress does slows sharply, currencies’ exalted valuations might be onerous to justify – the Norwegian crown’s worth on a trade-weighted foundation is close to its highest, relative to its median worth, for the final 50 years.

The Aussie and Kiwi {dollars} are additionally effectively above historic averages on a trade-weighted foundation, in keeping with Refinitiv knowledge.

Present alternate charges are pricing quite a lot of bullishness, stated Francesca Fornasari, head of foreign money options at Perception Funding, noting for example “relating to the Aussie, there’s quite a lot of optimism baked in about China, commodity markets and the central financial institution price trajectory.”

Reporting by Sujata Rao and Saikat Chatterjee; Modifying by Kirsten Donovan

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