HedgeFundLIVE.com – The Japanese earthquake has hit all markets at this point, including the currency markets. Japan is the world’s third largest economy according to the IMF, just behind the US and China.
The country itself is a volcanic island, which means natural resrouces are limited, by default such a large economy must also be a natural resource importer. Major imports include iron ore, bauxite, and aluminium. This all means that a near-term collapse (it won’t be permanent) of the Japanese economy will spell trouble for the Yen and for commodity currencies like the Aussie and Loonie. Following are some ideas, to play against the USD, not each other.
Australia is one of the world’s largest natural resources exporters and Japan is one of its biggest clients. Australia exports massive amounts of iron ore to Japan, to be used by auto manfucturers like Honda and Toyota. A massive setback in the Japanese economy will cause the Aussie to relatively weaken.
The Aussie is already dealing with downward pressure from massive flooding in January. Look for weakened numbers to hurt the Aussie in coming months. Below is a chart of the AUD/USD pairing, it has typically reached resistance near parity over the last few months and shot down. Expect to see more of the same.
The Loonie, is another example of a commodity currency. Canada is a huge exporter of lumber, oil, and other natural resrouces. It should be noted that the Canadian economy does not have outstanding problems, like Australia’s floods, so the weakness here won’t be as dramatic.
When investors become risk-averse money tends to flow from commodity currencies to safe-havens like the USD. Lately, the Loonie has had similar price action with crude oil. Look for the Loonie to struggle this week, however, world oil demand isn’t changing drastically, so there shouldn’t be long-term weakness.
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