Commodity currencies at risk as slowdown looms

NEW YORK (Reuters) - A global economic slowdown may undermine the strength of so-called “commodity currencies”, such as the Australian dollar and Chilean peso, if fading world demand ends the multi-year rally in metals and oil prices.

Rapid industrialization by Asian export powerhouses China and India in the last five years has propelled the prices of oil, gold, copper, wheat, soybeans and other commodities to record peaks, with these two countries snapping up everything from lumber to iron ore.

But that could change if the United States, the world’s largest importer of Chinese goods, slides into a recession.

“We think we’re entering a global slowdown, which means the investment boom in commodities will start to slow,” said Ian Stannard, senior currency strategist at BNP Paribas.

Agricultural commodities should remain sought-after due to strong population growth in emerging markets and weather-related shortages in some countries that have caused a spike in food inflation. This is good news for agricultural exporters such as New Zealand and Brazil.

The prognosis for commodities didn’t exactly start out dire in 2008. In the last few weeks, gold, platinum, and oil have hit record highs, boosted by an ailing U.S. dollar, making commodities priced in dollars cheaper overseas.

Tumbles in global stock markets have also driven investors to seek refuge in commodity investments, analysts say.

In recent days though, the prices of some commodities have slipped, haunted by U.S. recession fears.

In Asia, recent data show China has finally succeeded in applying the brakes to its red-hot economy also. China’s December export growth eased to 22 percent year-on-year, compared with 26 percent for 2007.


Analysts say three of the biggest casualties of falling commodity prices would be the Australian and Canadian dollars, as well as the Chilean peso.

“The Australian dollar has clearly benefited from record strength in the mining and metals industry,” said Adam Myers, currency strategist at Credit Suisse. “Despite recent record mining company revenues in Australia, slowing resources demand should negatively impact investments in 2008.”

Credit Suisse has revised lower its forecast for the Australian dollar versus the U.S. dollar. In three months, it expects the Aussie to fall to US$0.8200 against the U.S. dollar, from the current US$0.8850 AUD=.

The same is true for the Canadian dollar, which has fallen from its lofty perch against the U.S. currency, as oil prices softened after hitting record highs early this month. The Canadian currency has also struggled because a U.S. slowdown is seen hitting Canada the hardest with three quarters of its exports sent across the border.

Chile, the world’s largest copper producer, could also see its economy and currency decline if the metal’s price plummet.

On Wednesday, copper, probably the commodity most sensitive to global economic performance, slid to one-week lows as investor confidence deteriorated on concerns of a global slowdown.

Another ominous sign of an impending commodities slump was the steep fall in the Baltic Exchange's chief sea freight index .BADI for dry commodities. On Thursday, the index, a barometer of global demand, posted its sharpest one-day drop since records began in 1985. The index has tumbled 37 percent since a record high in November.

“It (the Baltic dry index) could imply weaker export volumes, even if commodity prices remain high. More worrisome is the possibility that its slide represents plunging demand, pulling commodity prices down,” said Steve Barrow, chief currency strategist, at Bear Stearns.

To be sure, not all commodity currencies are in trouble. Currencies tied to food and agriculture such as the New Zealand dollar and Brazilian real should do well, analysts say.

New Zealand has the largest agricultural exposure among commodity exporters, Credit Suisse data show, especially in dairy and meat products. Analysts say protein demand is income-sensitive and rising emerging market wages have led to improvements in diet, incorporating more milk, eggs, and meat.

“Adverse climate conditions in 2006 and 2007, (and) continued population growth, have resulted in record agricultural price inflation,” said Credit Suisse’s Myers. “Persistent drought argues 2008 will be no different. This should support agriculture-exposed currencies, if not help them strengthen further.”

Editing by Clive McKeef