Forex

Analysis – Dollar’s decline throws spotlight on battered commodity currencies

Published

1 year ago

July 26, 2023

Analysis - Dollar’s decline throws spotlight on battered commodity currencies

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Some investors are zeroing in on the battered currencies of commodity-producing countries such as Norway and Australia to take advantage of more potential weakness in the dollar, which has recently wobbled on signs the Federal Reserve will soon end its rate-hiking cycle.

Many commodity currencies suffered this year when prices for oil and other raw materials fell from their 2022 peaks amid expectations that central banks’ fight against inflation would hurt global growth and crimp demand for commodity exports.

However, growth in the U.S. and some other countries has proven resilient and strategists increasingly believe a global economic downturn is unlikely. While that’s driven rallies in risk assets such as stocks, raw materials prices and some commodity currencies have been slower to respond.

Some investors believe there’s an opportunity to buy on the cheap. Adding to the allure are expectations that the Fed’s rate increases – which helped lift to a two-decade high last year – are reaching a conclusion.

“Commodity currencies are still the currencies that will probably have the most upside potential, purely from a valuation perspective,” said Francesco Pesole, FX strategist at ING Bank, who favors the and the .

The bullish view on commodity currencies gained traction in recent days after leaders in China – the world’s leading commodity consumer – on Monday pledged to step up policy support for the economy.

Prices for oil, , and other raw materials rose on the news, while commodity currencies such as the Australian and dollars edged up. is down 3% year-to-date.

Meanwhile, the dollar could see more weakness if the Fed signals that it believes U.S. inflation will continue cooling, making future rate increases less likely.

The U.S. central bank is expected to announce a 25-basis-point rate increase at the conclusion of its monetary policy meeting on Wednesday, but investors believe the chances for more tightening beyond that are slim.

BARGAIN BIN

While some commodity currencies have enjoyed strong runs against the dollar this year, many bullish investors are looking for winners among the laggards.

Those include the Norwegian crown. The second worst-performing G10 currency against the U.S. dollar this year, the crown is down nearly 3% against the greenback, with analysts pointing to lower energy prices and a central bank that until recently had raised rates at a slower-than-expected pace.

Some other commodity currencies have seen similar declines, with the New Zealand dollar down 2% and the down 3%.

A Deutsche Bank analysis of currency valuations based on factors including terms of trade and gross domestic product shows the Norwegian currency undervalued against the U.S. dollar by more than 30%, while the Australian dollar is about 20% from fair value.

Thanos Bardas, senior portfolio manager at Neuberger Berman, believes the Australian dollar could appreciate if global growth is better than feared and commodity prices rise. A hopeful sign came Tuesday, when the International Monetary Fund raised its 2023 global growth estimates slightly.

“When you think of all the asset classes, the one that did not participate in this exuberance over a soft landing is commodities,” Bardas said.

Commodity currencies are far from the only way to play further dollar weakness. Deutsche Bank (ETR:)’s model shows the Japanese yen – which is off 7% against the buck this year as the Bank of Japan has kept rates ultra-low – to be among the world’s most undervalued currencies against the dollar.

“Most (valuation models) are screaming over-valuation for the U.S. dollar,” said Bipan Rai, North America head of FX strategy at CIBC, who believes the dollar is overvalued against currencies including the , , and .

Strategists, however, cautioned against putting too much stock in valuations, especially for short-term moves, because currencies can often stray from their fair value for months.

In addition, betting against the dollar carries its own risks. The U.S. currency could rebound if inflation proves stubborn, or the Fed is more hawkish than investors had priced in.

Still, some strategists believe there is plenty of room for the dollar’s peers to appreciate further.

Jane Foley, head of FX strategy at Rabobank, is upbeat on the currencies of Sweden and Norway. Given how undervalued they are, any sign of economic strength in the respective countries could lift the currencies, she said.

“They’re beginning to turn around. And I think they could have further to go,” she said.

Forex

Dollar now priced for perfection – BoA Securities

Published

23 hours ago

January 8, 2025

Investing.com – The US dollar has rallied strongly since the US Presidential election, from an already high level, and Bank of America Securities sees the currency now priced to perfection.

In real effective terms, BoA estimated that the dollar ended 2024 at a 55-year high, following the longest uptrend in recent decades, which started in mid-2011.

“The USD has also reached extreme levels in nominal terms. Using the BIS NEER broad index (nominal effective exchange rate), the USD is the strongest it has been in the last 30 years, which is when the time series started,” said analysts at BoA Securities, in a note dated Jan. 8.

The dollar appears overvalued by 18.5%, the most in the last 30 years except when it was overvalued by 19% during the energy shocks from the war in Ukraine in 2022, the bank said.

Its overvaluation increased by about 6.4% since the end of Q3 last year, to a large extent because of the US election. By comparison, it was overvalued only by 9.4% at the end of 2016, after Trump won his first US election.

Looking at G10 equilibrium estimates, the USD clearly stands out as the most overvalued – followed by CHF, with JPY and the Scandies being the most undervalued.

“We expect the USD to remain strong in the short term on the back of US inflationary policies, and particularly tariffs, but to weaken later in the year, as these policies take a toll on the US economy while the rest of the world responds. Policy uncertainty makes our baseline subject to substantial risks,” said BoA Securities.

Forex

Dollar boosted by rising Treasury yields; euro slips on weak data

Published

23 hours ago

January 8, 2025

Investing.com – The US dollar rose Wednesday, benefiting from rising bond yields after the release of healthy US economic data, while weak German industrial orders weighed on the euro.

At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 108.690.

Dollar gains as Treasury yields soar

The dollar has continued to push ahead Wednesday, following on from the prior session’s positive tone after data showed US unexpectedly rose in November, layoffs were low, while services sector activity accelerated in December and a measure of prices paid for inputs hit a two-year high.

This resulted in 10-year Treasury yields climbing to an eight-month high, while the benchmark 30-year yield came close to the 5% level.

“Yesterday’s US data releases were hawkish for the Fed, and the implied probability of a March rate cut has now dropped below 40%,” said analysts at ING, in a note.

“The most remarkable print was the ISM prices paid subcomponent, which spiked to the highest level since January 2023. If a generally resilient economy was already accounted for when the Fed met in December, a resurgence in inflation concerns could drive an even further hawkish tuning in the policy message.”

The Federal Reserve cut the number of rate cuts it sees this year to two at its December meeting, but traders are now only pricing in around 37 bps of easing through this year, according to LSEG data.

There is more data to digest Wednesday, in the form of the monthly and weekly , ahead of Friday’s release of the closely watched US for further clarity on the health of the world’s largest economy.

German economic weakness weighs on euro

In Europe, fell 0.2% to 1.0326, adding to the losses of around 0.5% overnight after the release of more disappointing economic data from the region’s largest economy – Germany.

fell 5.4% in November, sapped by a decline in large orders, while the country’s fell 0.6%, bursting hopes for a boost from pre-Christmas promotions like Black Friday and Cyber Monday.

Investors are currently looking for the to ease interest rates by around 100 basis points in the first half of 2025.

“There is only a speech by French central bank governor Villeroy to watch in the eurozone calendar today. EUR/USD may find decent support at 1.0300 for now,” said ING.

traded 0.2% lower to 1.2447, with little in the way of economic data due for release Wednesday, and only a speech from Bank of England Deputy Governor Sam Woods to digest.

The held interest rates unchanged last month, and is expected to proceed cautiously with further rate cuts this year with inflation still above target.

Yuan sentiment remains weak

In Asia, rose 0.1% to 7.3511, with the Chinese currency hitting its weakest level in 17 years earlier in the week.

Sentiment remains weak surrounding China ahead of President-elect Donald Trump’s inauguration on Jan. 20, with Trump having vowed to impose steep trade tariffs on China.

gained 0.1% to 158.19, after recovering marginally from its weakest level in nearly six months.

The yen stemmed its recent losses after government officials offered a verbal warning on potential currency market intervention, which saw traders adopt more caution in shorting the Japanese currency.

Forex

Dollar strengthens on elevated US bond yields, tariff talks

Published

23 hours ago

January 8, 2025

By Tom Westbrook and Greta Rosen Fondahn

SINGAPORE/GDANSK (Reuters) -The dollar rose for a second day on Wednesday on higher U.S. bond yields, sending other major currencies to multi-month lows, with a report that Donald Trump was mulling emergency measures to allow for a new tariff program also lending support.

The already-firm dollar climbed higher on Wednesday after CNN reported that President-elect Trump is considering declaring a national economic emergency as legal justification for a large swath of universal tariffs on allies and adversaries.

The was last up 0.5% at 109.24, not far from the two-year peak of 109.58 it hit last week.

Its gains were broad-based, with the euro down 0.43% at $1.0293 and Britain’s pound under particular pressure, down 1.09% at $1.2342.

Data on Tuesday showed U.S. job openings unexpectedly rose in November and layoffs were low, while a separate survey showed U.S. services sector activity accelerated in December and a measure of input prices hit a two-year high – a possible inflation warning.

Bond markets reacted by sending 10-year Treasury yields up more than eight basis points on Tuesday, with the yield climbing to 4.728% on Wednesday.

“We’re getting very strong U.S. numbers… which has rates going up,” said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:), pushing expectations of Fed rate cuts out to the northern summer or beyond.

“There’s even the discussion about, will they cut, or may they even hike? The narrative has changed quite significantly.”

Markets are now pricing in just 36 basis points of easing from the Fed this year, with a first cut in July.

U.S. private payrolls data due later in the session will be eyed for further clues on the likely path of U.S. rates.

Traders are jittery ahead of key U.S. labour data on Friday and the inauguration of Donald Trump on Jan. 20, with his second U.S. presidency expected to begin with a flurry of policy announcements and executive orders.

The move in the pound drew particular attention, as it came alongside a sharp sell-off in British stocks and government bonds. The 10-year gilt yield is at its highest since 2008. [GB/]

Higher yields in general are more likely to lead to a stronger currency, but not in this case.

“With a non-data driven rise in yields that is not driven by any positive news – and the trigger seems to be inflation concern in the U.S., and Treasuries are selling off – the correlation inverts,” said Francesco Pesole, currency analyst at ING.

“That doesn’t happen for every currency, but the pound remains more sensitive than most other currencies to a rise in yields, likely because there’s still this lack of confidence in the sustainability of budget measures.”

Markets did not welcome the budget from Britain’s new Labour government late last year.

Elsewhere, the yen sagged close to the 160 per dollar level that drew intervention last year, touching 158.55, its weakest on the dollar for nearly six months.

Japan’s consumer sentiment deteriorated in December, a government survey showed, casting doubt on the central bank’s view that solid household spending will underpin the economy and justify a rise in interest rates.

hit 7.3322 per dollar, the lowest level since September 2023.