Growth-linked currencies such as the Australian, New Zealand and Canadian dollars have gained broadly in the New Year, but concerns about slowing global activity and worries about a euro zone debt default could take some of the shine off. Investor appetite for riskier assets like stocks has been underpinned in the first weeks of 2012 by signs of recovery in the United States, a large injection of European Central Bank cash and receding expectations of a hard landing in China.
This has led to gains in the three commodity-linked currencies, which often move in line with stocks. But those advances are likely to be tempered in coming months and some analysts say fresh highs are unlikely. "I do not think these gains in commodity currencies will persist," said Adam Myers, senior currency analyst at Credit Agricole in London. "There is a lot of optimism about Chinese growth, but things in the euro zone are far from stabilising and this will drag on overall global growth."
The Australian dollar has gained 2 percent against the US dollar so far this month, while the New Zealand dollar has added 3 percent. The greenback has fallen 1.2 percent against the Canadian dollar. Strategists at UBS expect a serious deteroration of the euro zone debt crisis by mid-March when Greece has a huge bond redemption to pay. They say this is likely to lead to a sharp increase in global risk aversion.
In such an environment they expect the Australian and New Zealand dollars to fall sharply from around $1.0420 and $0.8023 respectively. UBS expects the Aussie to fall to $1.00 in one month's time and to $0.93 in three. It also forecasts the New Zealand dollar will drop to $0.72 in three months, while the US dollar is expected to climb to C$1.10 during the same time from around C$1.0075 on Thursday. The World Bank warned this week developing countries on Wednesday to prepare for the "real" risk that an escalation in the euro area debt crisis could tip the world into a slump on a par with the global downturn in 2008/09.
Added to that, increased fears about the stability of the European banking sector could spur a fresh bout of risk aversion. Analysts say China has yet to emerge as a source of stability and could in fact pose a risk to global growth given conflicting signals from recent data. John Normand, head of global FX strategy at J.P. Morgan says Chinese house prices were still falling, small-enterprise business surveys pointed to contraction while those of large enterprises showed expansion.
"That seems hardly a backdrop for owning commodity currencies," he said. Normand said geopolitical risks in the Gulf would lead to an oil price spike that in turn would see more volatility, erode confidence and force carry trades to be unwound. Risk reversals, a measure of the premium required to hold a put or a call in a currency, remain skewed in favour of Aussie and New Zealand puts - bets that the currency will fall -although the premiums have narrowed. That means investors are not hedging for big losses in these currencies, right now.
Stuart Frost, the head of Absolute Returns and Currency at RWC Partners says 2012 would see the US dollar make gains on the back of a recovery in the world's largest economy. "We think there is room for the dollar index to rise as the US economy emerges from a slowdown. The dollar's rebound should see the commodity currencies stay shy of their peaks, although having said that they will remain a buy on dips."
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