After being in high demand earlier this year, commodity currencies have been on the nose with investors in recent months.
Traders have been scaling back long positions in currencies such as the Australian, New Zealand and Canadian dollars, according to recent data released by the US Commodity Futures Trading Commission, and prices have followed suit.
According to analysis released by Goldman Sachs, the Aussie, Kiwi and Loonie, as they are known, have fallen by 4%, 6% and 5% in trade-weighted terms from the highs seen in February this year.
They’ve been under pressure, but Silvia Ardagna and Lorenzo Incoronato, FX strategists at Goldman, think that’s about to change.
Particularly against the high-flying euro.
“Based on our recently revised forecasts, G10 commodity currencies should continue to appreciate over the coming 12 months, particularly versus the EUR and the Yen,” the pair wrote in a note this week.
Ardagna and Incoronato cite economic strength, expectations for very accommodative monetary policy for the remainder of this year and the likelihood of a rebound in crude oil prices as three catalysts that will support commodity currencies moving forward.
“Among the four commodity currencies, our forecasts imply that the NZD and CAD are likely to see a stronger appreciation than the AUD,” they say.
And while they see more upside for the Kiwi and Loonie compared to the Aussie, Ardagna and Incoronato believe that all three are likely to rally against the euro, the best performing G10 currency in recent weeks.
“Tactically, we think the largest upside for the G10 commodity currencies is versus the EUR as the market appears to have moved too fast to price in expectations of a hawkish policy shift from the ECB at the June meeting, given the still weak Euro area inflation outlook,” they say, noting that they expect the CAD to perform best against the euro over the next 12 months.
“Our preferred ‘long oil’ opportunity is long CAD versus EUR,” says Ardagna and Incoronato.
“Not only do we think the market is too pessimistic on Canada and is underestimating the strength of the economy but, historically, CAD has been the G10 currency with the highest beta to increases in oil prices. Hence, the currency should reprice the most as the oil price moves higher.”
This chart from Goldman looks at the degree the Aussie, Kiwi and Loonie is expected to rally against the euro, yen and in trade-weighted terms over the next year based of the bank’s modelling.