By Sujata Rao and Saikat Chatterjee
LONDON (Reuters) – After huge rallies fueled by surges in commodity prices, the tide could turn for currencies such as the Australian dollar and Colombian peso as fears of slowing global growth ease. settle in the markets.
As inflation and rising borrowing costs dampen business and consumer spending, the International Monetary Fund and World Bank this week slashed global growth forecasts by nearly a full percentage point and signaled the risk of further declines resulting from COVID lockdowns and China’s sanctions on Russia.
The warnings sent oil and metals prices tumbling, although tight supplies of most commodities have so far limited losses. Brent crude futures remain above $100 a barrel while the Refinitiv CRB commodity index is still up nearly a quarter this year.
Eight of the 30 best performing currencies this year in a group monitored by Societe Generale are linked to commodities. In a smaller G10 group, four of the top five come from commodity-exporting nations, according to Refinitiv data.
Societe Generale strategist Kenneth Broux, however, believes the rally is “running on fumes” with a big test for commodity currencies coming from US real yields – or US-adjusted 10-year Treasury yields. inflation – turning positive this week for the first time in two years.
Central banks are also tweaking their hawkish credentials, especially the US Federal Reserve.
A BofA investor survey this week predicted the Fed would hike rates more than seven times this year, up from four times in a March survey.
Anticipation of the resulting slower growth may already be gaining the upper hand in commodities and commodity-linked currencies like the Australian dollar, which gained 10% against the greenback between the end of January and end of March.
The Brazilian real has gained 18% this year and the Colombian peso 8%.
“Latin American energy exporters long and Asian importers short” have been the most concentrated currency exchanges this year, the head of a US bank’s currency desk said.
April, however, brought a turnaround. The Chilean peso, for example, lost nearly half of its first-quarter gains as copper prices fell, while signs of a Chinese slowdown weighed on the Australian and kiwi dollars.
Morgan Stanley’s proprietary FX positioning tracker, calculated from clients’ positions in the options market, reflects that shift, said James Lord, the bank’s global head of foreign exchange.
“Usually exchange rates tend to be highly correlated and tend to move in the same direction, but we’ve seen a huge decoupling between commodity exports and import currencies year-to-date.” , Lord said.
On Morgan Stanley’s minus 100 to plus 100 scale, where 0 is neutral, commodity currency positioning hit 75 in March, the highest according to data dating back to 2014. The score has since eased , albeit at a still bullish 62.
“Commodity exporter currencies could start to weaken from here because global growth is slowing,” Lord said, noting that extreme positioning means there’s “a lot of flow that can go in the other direction”.
A LOT OF OPTIMISM
The catalyst could be China.
The yuan, crucial to the trajectory of commodities, fell to a two-month low against a basket of currencies and a Reuters poll shows analysts are “short” the yuan for the first time since October.
With swathes of China under COVID lockdown, a gauge of hedge fund positioning compiled by the US CFTC shows a sharp drop in net Australian dollar buying – currently $2.1tn from six-year highs around $6.5 billion in January.
Net long positions in Brazilian real held up better, although they were also off early March record highs of nearly $1 billion. Hedge funds also stopped buying the kiwi and the Canadian dollar, according to the data.
If growth slows sharply, high currency valuations will be hard to justify – the value of the Norwegian krone on a trade-weighted basis is close to its highest, relative to its median, in the past 50 years.
The Australian dollar and kiwi are also well above historical averages on a trade-weighted basis, according to data from Refinitiv.
Current exchange rates are pricing up a lot, said Francesca Fornasari, head of currency solutions at Insight Investment, noting for example “when it comes to the Aussie, there’s a lot of optimism about China. , commodity markets and central bank rate trajectory.”
(Reporting by Sujata Rao and Saikat Chatterjee; Editing by Kirsten Donovan)