Aussie, Canada, Brazil get thumbs up

NEW YORK (Reuters) - Incipient signs that economies worldwide are on the mend should bolster the appeal of commodity currencies such as the Australian and Canadian dollars, as well as the Brazilian real, top strategists said this week.

One even suggested these currencies are stable and liquid enough to be included in the foreign exchange reserves portfolio of global central banks.

Over the last two months, the currencies have surged from 6 percent for the Canadian dollar to as high as 13.9 percent for the New Zealand dollar as oil, gold and copper prices strengthened.

The oil-sensitive commodity index .CRB has risen around 15 percent since May on what many strategists believe to be indications that the pace of production and economic activity has improved.

"Within the G10 space, commodity currencies are the ones that are really getting the closest attention," said Steven Englander, head of currency strategy in North America at Barclays Capital.

"There is the recovery story. There is the valuation story," Englander told the Reuters Investment Outlook Summit in New York.

In general, the Australian dollar's price movements are usually tied to gold prices because the country is the fourth-largest gold producer. The Canadian dollar typically moves in tandem with oil prices, while the currency of New Zealand, whose economy is dominated by dairy exports, typically gets a boost when commodities in general are higher.

Even if commodity prices do come down, as most strategists at the summit predicted, these countries' generally healthy economic fundamentals should still support their currencies.

In the case of Brazil, the world's largest iron ore exporter, its interest rate of 9.25 percent is one of the highest in the investment world and is a major reason investors have flocked to the Brazilian real.

The currency has surged about 11.7 percent against the U.S. dollar in the last two months and is a favorite among strategists at the summit.

"It's a beautiful event for Brazil," said Alberto Bernal, head of emerging markets fixed income research at Bulltick LLC, referring to Brazil's high interest rates.

"This has never happened before. One of the things that we Latin Americans envy from the Brazilians is that they can grow with those types of rates ... Even if you go to the bank today, you ... get 40-45 percent rates, and people still borrow."

AUSTRALIA, CANADA EASING CYCLE ENDING?

In the case of Australia and Canada, strategists believe their central banks are near the end of their monetary cycles, which should ensure yields on their assets are not eroded further.

Goldman Sachs Senior Investment Strategist Abby Joseph Cohen has also taken notice of commodity currencies. She expects a steady U.S. dollar over the next few months, except against the commodity-based units.

"You think about the Canadian dollar or the Australian dollar," Cohen said. "These are two economies that have a much heavier commodity exposure than the United States and so their currencies often do trade relative to the price of commodities, which have already began to move higher."

Barclays' Englander said commodity currencies would be a great way to diversify central bank reserves. For any economy worried about commodity price shocks, "having commodity currencies in your reserves basket sounds like a ... good idea."

Yet the strength of these currencies has raised concerns that their rise could hurt their economies' export sectors. A strong currency makes exports expensive in the international market and adds pressure to an export-oriented economy.

That is especially the case in Canada. Bank of Canada Governor Mark Carney has sounded the alarm twice about the steep rise in the Canadian dollar.

The Reserve Bank of New Zealand is in the same boat as the BoC. The RBNZ earlier this week said the New Zealand dollar, which has been the best-performing currency in the developed world since March, "risks undermining the recovery before it becomes self-sustaining."

Thus over the next few weeks, these currencies could pull back from their lofty levels once investors realize their economies could suffer if these units rise sharply. However, many feel a pullback would be temporary.

Once a global rebound gets going, the Australian, New Zealand, and Canadian dollars, along with the Brazilian real, should once again reign supreme in the currency market.

(For summit blog: blogs.reuters.com/summits/)

(Editing by Dan Grebler)