September 26, 2017 Facebook  twitter  Google+
Could Be A Disaster for These Currencies
 
Andrew Beattie
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Some currencies that might be in for a kick in the teeth in 2016. (For related reading, check out our Primer On The Forex Market.)


The AUD and CAD

The commodity currencies have already taken a beating, but as they probably say in the mafia, why stop at kneecaps when there are still all those fingers and toes. The Australian dollar and Canadian dollar - among others - have depreciated against the U.S. dollar as the demand for commodities like crude oil has waned. Part of this waning demand, of course, is the glut of oil, but there is also a larger story in the slowing growth in China and the other BRIC nations. This slowing growth in the emerging economies has an outsized impact on commodities as their growth phase is typically driven by increased production that requires a constant stream of coal, ore, oil and so on.

Without that demand, the commodity values drop and the currencies more or less backed by those commodities weaken in response. In some cases, this drop in currency can stimulate other sectors of the economies of these nations, such as agriculture or manufacturing. That said, on an overall effect, the wins for other sectors are usually not enough to replace the losses for the commodity sectors which is why these currencies are known as commodity currencies in the first place. Right now, both Australia and Canada have seen their currencies weakening as sectors that have driven steady economic growth struggle with low prices, and this trend looks to continue into 2016.

The Real and Ruble

Brazil and Russia are both forecasted to deepen into recession and their currencies reflect that prediction right now. Brazil is a victim of the commodity slide that has affected both investment in its energy sector and mining industry returns. The market was already a bit sour over the real (BRL) and Brazil in general for reasons ranging from the unrest and risk around hosting the olympics to the Petrobras scandal that unfolded in late 2014 and 2015. Along with the rest of the BRIC nations, Brazil’s growth has hit a significant speed bump and the Real is paying the price.

Russia is in a similar situation with the oil price severely impacting the performance of theruble. What makes Russia unique is a seemingly unending appetite for making things worse. Russia’s conflict with Ukraine and the position it has taken in Syria aren’t expediting the removal of the sanctions from the EU and the United States. The ruble will continue to take a kicking unless energy rebounds hard because Putin is unlikely to change the course that has kept him in power this long.

The Yuan

It is a bit of a stretch to call a continuing weakening of the yuan a disaster. Unlike the commodity currencies, big sections of the Chinese economy become more globally competitive as the yuan weakens. The flipside of that, however, is that the cash assets of Chinese citizens take a hit as does their international purchasing power. Many traders who have stayed long the yuan saw their bets suddenly turn on them with the government shift in managing the currency and the new instability may push many deals from using the yuan as a base currency.

The Bottom Line

There is always the caveat with any kind of forecast that the base conditions used can (and will) change. Maybe the addition of Iran’s oil to the global supply will push prices lower or maybe a regional conflict curbs production - both are in the realm of possibility but no one really knows. As it stands now, the pain will continue for the CAD, AUD, RUB, BRL and CNY with the USD continuing to stay strong against all five.

 
03-July-2016
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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