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Commodity Dollars Bounce Back on Easing Headwinds But Outlook Remains as Clouded as Ever

Commodity-driven currencies such as the Australian, New Zealand and Canadian dollars are enjoying a bit of a reprieve from an extended sell-off as rekindled hopes of a US-China trade deal and increased stimulus around the world have energized the struggling currencies. But despite early indications that the upcoming trade talks may actually produce substantive progress, the range of factors weighing on the aussie, kiwi and loonie means more downside is likely to come.

The ongoing trade war has dented the outlook for commodities as, aside from the fact that China is the world’s biggest consumer of commodities, the resultant economic slowdown globally from protectionist policies is further dampening the demand picture.

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Australia has potentially the most to lose from a worsening and prolonged trade conflict as the largest chunk of its exports are shipped to China, of which are mostly comprised of commodities. Canada is also at significant risk as it relies heavily on energy exports and its economy is closely tied to the United States, while New Zealand’s exposure to world trade makes it vulnerable to disruptions in trade flows.

But although none of the said countries are presently at risk of a recession, their currencies have been under pressure for most of the year. Market expectations earlier in the year that policymakers will not be able to fulfil their tightening ambitions turned to bets that the next move in interest rates will be down as the economic outlook deteriorated while the trade war saga dragged on.

RBA easing cycle may be short

The Australian dollar has been on a downtrend since the early parts of 2018, when the synchronised gl