It might be the end of the week, but that doesn’t mean you shouldn’t be on the lookout for fresh trading opportunities!
Today we’ll take a look at the major commodity-related (comdoll) currencies. For newbies out there, “comdolls” usually refers to the Australian (AUD), Canadian (CAD), and New Zealand (NZD) dollars.
Since their economies rely on exporting commodities, they tend to react not only to developments in their respective economies, but also to trends in commodity prices.
So, why have they been making pips rain lately? Here are possible reasons:
1. Better global growth prospects
A few days ago the International Monetary Fund (IMF) affirmed its global growth forecasts, maintaining that the global economy will pick up by 3.5% which is higher than 2016’s 3.2% uptick. And while it downgraded prospects for the U.S. and the U.K., it upgraded its outlook for Japan, Euro Zone, and China’s economies.
It also helps that the U.S. has had time to (somewhat) adjust to a new Prez; Brexit concerns have eased; threats of a Frexit and Eurozone break-up have abated, and China seems to be handling shadow banking and “hard landing” risks pretty well. As a result, market players are finding it easier to take on riskier bets around the globe.
This is good news for higher-yielding currencies like the comdolls, which tend to rise when traders are feeling optimistic on the markets.
2. Higher commodity prices
Q2 2017 was NOT a good quarter for iron ore prices, which fell sharply and steadily on oversupply concerns and fears that construction activity in China will slow down.
The commodity only started crawling back up in late June when credit concerns for China’s companies, better Chinese demand prospects, and lower steel stock speculations pushed prices higher.
Crude oil also saw its share of headaches in June when it entered bear market on the back of fresh oversupply concerns.
The Black Crack didn’t come up for air until almost mid-July when lower supply reports from the U.S. and hints of cooperation among OPEC producers started getting priced in.
Last but not the least is gold, which got dumped in June when rate hike prospects from the Fed dragged the safe haven lower in favor of higher-yielding assets like currencies.
However, it found support around its May lows and a bullish momentum gained ground around the time market players started tempering their Fed rate hike expectations. Which brings me to my next point…
3. Rate hike expectations
Unless you’ve been too busy reading “How to be Jeff Bezos” articles, you should know that major central banks like the Fed, ECB, BOE, and BOC have been feeling pretty optimistic about their economies, enough to consider taking away part of their stimulus programs.All the rate hike hoopla started in late June when pals Draghi, Carney, and Poloz hinted that their respective central banks are ready to join the Fed in the tightening bandwagon.
Fast forward to today when BOE’s MPC members have signalled their hawkishness; the ECB could start talking about tapering its QE program “in the Autumn,” while the BOC straight up raised its rates by 25 basis points.
The combination of higher commodity prices, better growth outlook, and interest rate hike expectations all promote carry trade bets.
Remember that this basically means buying currencies with high interest rates and selling them against currencies with lower rates to take advantage of the interest rate differential. Read our Carry Trade 101 if you want to know more about the strategy!
4. Technical support and resistance levels
Last but definitely not the least reason for the comdoll rallies is that major comdoll pairs like AUD/USD, USD/CAD, and NZD/USD have all hit major technical support and resistance levels that are significant enough to deter further selling.
As you can see on the monthly charts above, both AUD/USD and NZD/USD are marking upside breakouts from consolidations around rising trend line retest levels.
Meanwhile, reversing USD/CAD’s charts shows us a bounce from a MAJOR support level that has once served as resistance for CAD/USD.
So it looks like the trading stars are lining up in favor of the comdolls these days. But before you buy them like there’s no tomorrow, take note that the uptrends might not last much longer.
For starters, central bank officials like RBA’s Philip Lowe and RBNZ Deputy Governor John McDermott have shown their preference for a weaker currency as recently as this week.
Lowe said that it would be helpful if the Aussie was “a bit lower,” while McDermott shared that a lower Kiwi “would help rebalance economic growth.”
And then there’s CFTC’s COT report, which reflects consecutive weeks of net bullish positioning for AUD, CAD, and NZD. I don’t know about you, but unless we see fresh catalysts, it’s likely that comdoll bulls will eventually be outnumbered by the bears!