Dovish Outlook Seen For Major Commodity Currencies

With prices of the major export commodities of Australia, New Zealand and Canada going downhill, their currencies have taken a hit. While prices may recover next year, a rally in these currencies against the US dollar may not be triggered owing to the diverging monetary policy outlook in these countries and in the United States.

Fall in the price of iron ore, the major export of Australia, over the past year or two has significantly weakened the AUD. Against the USD, it has fallen from 1.0381 (high May 2013) to 0.7099 where it currently trades. The weakening of iron ore price will act as a major drag on the economy and further compel the Reserve Bank of Australia to ease its monetary policy.

"As far as Australia is concerned, we forecast that the key policy rate will be lowered further from 2.0% to 1.5% by the end of next year, whereas overnight indexed swap (OIS) rates imply that it will be closer to 1.85%”, said Capital Economics in a research note to its clients.

Likewise, the price of New Zealand’s biggest export commodity that primarily comprises of dairy produce has been plummeting. NZD/USD has fallen from 0.8836 (High July 2014) to current trading levels of 0.6482. As such, the country’s monetary policy outlook point towards a cut in the key rate.

“In New Zealand, we project that the key rate will be reduced from 2.75% to 2.0%, compared to an implied OIS rate of around 2.45%”, added Capital Economics.

Coming to Canada, oil prices have also significantly fallen dragging down the Canadian dollar. Analysts expect the BOC to slash the key rate from 0.5% to 0.25. But, market speculations are rife that the U.S. Federal Reserve will hike interest rates. The forecast for the Federal funds rate is in a range of 1.75-2.0% for end-2016, whereas the implied OIS rate is only 0.8%.

The diverging monetary policy outlook in these countries and the U.S. suggests dovish outlook for the Aussie, the Kiwi and the Loonie. Capital Economics expects further weakness in the Aussie and Kiwi, with end-2016 forecasts at US$0.65 and US$0.55, respectively. However, the CAD is expected to remain around its current level of 1.33 to the USD, despite some increase in the price of oil.