NEW YORK: To foreign-exchange traders, the currencies of commodity exporters are all in the same boat — and it’s going down.

The long suffering exchange rates for Australia, Canada and Brazil have become increasingly correlated with each other during the past month, and banks including BNP Paribas, citing an indicator of momentum, and Barclays, noting economic headwinds, say there are more losses to come.

“It’s bearish across the board — we’re negative on all commodity currencies,” said Atul Lele, chief investment officer of Nassau, Bahamas-based Deltec Inter­national Group, describing the declines as a once-in-a-generation move. “The selloff will become more persistent” when the Federal Reserve raises interest rates, said Lele, who manages $2 billion.

Raw-material exporters were the biggest losers in foreign-exchange markets during the third quarter amid supply gluts and concern that slowing global growth will crimp demand.

The Bloomberg Commodity Index, which tracks raw materials including crude oil and copper, slid 14 per cent in the past three months for the biggest drop since 2008. Commodity markets should brace for another shock as the Fed prepares to raise interest rates, Morgan Stanley said in a report.

Nine currencies of commodity-exporting nations are showing a highly significant correlation with each other, according to data compiled by Bloomberg. For example, some of the strongest links are between oil exporters such as Norway, Canada and Mexico, as well as regional neighbours Australia and New Zealand. That means they tend to move in the same direction, and right now, that’s lower.

In just the past two weeks, the Brazilian real and South African rand both plunged to records, while the Norwegian krone and Canadian dollar dropped to levels not seen in more than a decade. The third-quarter slide was the worst in almost four years for a basket of eight currencies tracked by WisdomTree Investments Inc’s Commodity Currency Strategy Fund.

The outlook for raw-material producers deteriorated further after China’s shock devaluation of the yuan in August and the Fed’s decision to hold interest rates near zero on Sept 17 sparked concern about slowing global growth and fuelled demand for refuge assets.

“Commodity currencies will likely continue to face headwinds as these economies wake up to a new reality,” Jose Wynne, head of foreign-exchange research at Barclays, wrote in a note. The bank has a negative outlook for all currencies of resource-exporting nations, particularly Australia and New Zealand, which are projected to depreciate 12pc in the next year against their US counterpart.

Some exchange rates have fallen further and faster than analysts predicted. The Canadian dollar plunged to an 11-year low of C$1.3457 against the greenback on Sept 29, close to the median analyst forecast for the end of this year of C$1.34. That prediction reflects a 16pc downgrade from estimates at the start of the year. The loonie was at C$1.3230 in New York.

The Aussie and New Zealand’s kiwi are also trading near their year-end targets a quarter ahead of schedule.

Brief rebounds have been posted. The Brazilian real fell to a record low at 4.2478 per US dollar on Sept 24 before it rebounded more than 5pc the same day.

Short-lived rallies aside, BNP Paribas analysts said the negative trend is still intact. Norway’s krone has the most downside momentum, followed by Canada’s dollar, according to the bank’s analysis.

Derivatives indicate Norway’s interest rates may move lower even after the central bank unexpectedly reduced rates on Sept 24. In Canada, the chances of political paralysis after next month’s national election are adding to pressure from the 15pc drop this year in the price of oil, the country’s largest export.

“Bearish momentum remains strong,” James Hellawell, a quantitative strategist at BNP Paribas in London, wrote in a report.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, October 4th, 2015

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