Aussie's Rally With Loonie Set to End on Rate-Cut Risk, BNP says

The rally in the dollars of Australia and Canada may be nearing an end after they led gains among Group-of-10 currencies in the past month, according to BNP Paribas SA.

Both commodity-backed dollars have been supported as investors were forced to unwind bets on further weakness, Daniel Katzive, the New York-based head of foreign-Exchange strategy for North America at BNP, said by phone. The Aussie has climbed 5.1 percent in the past month and touched a near eight-month high on Monday, while the loonie advanced 4.7 percent to reach its strongest level since November.

“Commodity currencies have basically seen short positions erased based on our position analysis, but we don’t think the market really wants to be long,” Katzive said. “The markets are still probably underpricing risks or chances that central banks in these economies cut rates further. Overall, we think increasingly risks are to the downside even versus the U.S. dollar for Aussie and the Canada dollar.”

The Aussie fell 0.5 percent to 74.34 U.S. cents as of 10:47 a.m. in Tokyo on Tuesday, after completing its biggest six-day advance since 2011. The Canadian dollar fetched C$1.3295 per greenback.

Reserve Bank of Australia Deputy Governor Philip Lowe said most central banks would like weaker currencies as global growth is disappointing and inflation outcomes are low. He said the Australian dollar’s appreciation over the past couple of weeks is “relatively mild” in the overall scheme of things, partly on the back of higher commodity prices. “I think, like everyone, we would welcome a slightly lower exchange rate” to help with rebalancing of the economy, Lowe said in a speech Tuesday in Adelaide.

Market Reversal

The currencies of commodity-exporting nations have surged as a gauge of raw materials prices had its longest rally in two years. The price of iron ore, Australia’s chief export, rose 19 percent Monday, taking March’s surge to about 28 percent.

The gains are a reversal from 2015 when the currencies of Canada, Norway, New Zealand and Australia slumped amid concern China’s economy was slowing and the supply of commodities such as oil and iron ore was exceeding demand.

Volatility in financial markets increased during 2015 and the start of this year, driving demand away from the currencies of nations that depend of external capital to fund their current accounts, the widest measure of trade. Australia’s runs a deficit of about 4 percent of gross domestic product, while the figure is 2.9 percent for Canada.

“The global financial environment is probably going to be too volatile for current account deficit economies” to have well-performing currencies, BNP’s Katzive said.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net, Chikako Mogi in Tokyo at cmogi@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Naoto Hosoda, Nicholas Reynolds

By: Candice Zachariahs and Chikako Mogi

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