Sunday, January 17, 2010

In Currency Markets, Back Commodities Plays

Boosted by growth in China and other emerging markets, commodity-backed currencies look set to outshine the dollar and euro in the near term.
The challenges evident in the U.S. labor market and real-estate sector have sapped December's optimism over a rapid U.S. economic recovery. The rebound isn't taking hold fast enough to convince investors that the Federal Reserve will raise interest rates soon, leaving the dollar to languish under ultralow rates, intended to stimulate the economy, that making it unappealing as an investment currency. The euro is weighed down by concerns about the stability of the financial systems of someeuro-zone members.
The currencies of the commodity-exporting economies of Australia, Canada and New Zealand stand to benefit the most from improving global conditions. These three currencies are often called the dollar bloc as they tend to advance or retreat in unison.
"The kind of countries we're investing in tend to play into a global recovery story," and emerging-market and commodity-backed countries are most attractive, said Geoffrey Pazzanese, co-manager of Federated Investors Inc.'s $710 million Intercontinental Fund.
Late Friday in New York, the euro was at $1.4379, down from $1.4499 late Thursday. The dollar was at 90.83 yen from 91.10 yen, while the euro was at 130.54 yen from 132.09 yen. The U.K. pound fell to $1.6259 from $1.6324, and the dollar firmed to 1.0267 Swiss francs from 1.0188 francs.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 77.222, from 76.729 on Thursday.
The euro this week should trade between $1.4370 and $1.4620, analysts said. The dollar should trade between 90.60 yen and 93.80 yen.
Despite a hiccup as fiscal concerns within the euro zone and a possible increased tightening in Chinese fiscal policy swept the market on Friday, the dollar-bloc currencies will outperform their competitors in the near term, analysts said.
As the global recovery picked up steam at the end of 2009, Investec Asset Management in London sold some investments in dollar-bloc currencies to take profits on positions that had run up big gains, said Thanos Papasavvas, head of currency management for the firm.
"We've put some of that risk back on," buying into the commodity-backed currencies in 2010, "because the overall environment is quite positive," said Mr. Papasavvas, whose firm manages more than $60 billion.
Dollar-bloc currencies should benefit from Thursday's release of fourth-quarter Chinese gross domestic product, which is expected to have grown 10.8% from the year-earlier quarter, according to a Dow Jones Newswires survey of economists.
Even if China continues on its path to slowly tighten fiscal policy, strong growth in emerging markets should keep demand stoked for commodities, helping prop the dollar-bloc currencies, said Robert Lynch, currency strategist at HSBC in New YorkThe Australian dollar hit a nearly two-month high against the U.S. dollar Thursday, while the Canadian dollar soared to a three-month high. Both slipped a bit Friday, but are expected to rebound.
The Australian dollar this week should trade around $0.9093 to $0.9330, while the U.S. dollar should trade around C$1.0200 to $C1.0420, analysts said. Late Friday in New York, the Australian dollar was at $0.9236, while the U.S. dollar was at C$1.0295.
"We're quite confident that the commodity currencies are going to have pretty well-supported levels," Mr. Papasavvas said. "Even if they don't rally against the [U.S.] dollar dramatically, we would expect them to appreciate."
For much of 2009, the euro would gain when the global economic picture brightened and investors decided to buy riskier assets, but that relationship has broken down so far this year. The currency will sag under the weight of fiscal worries in the euro zone, especially concerns about how Greece will reduce its outsized deficit, analysts said.
"The euro is a major currency that's just a baby, and is still going to be going through growing pains," said Jonathan E. Lewis, founding principal of Samson Capital Advisors, which has $6.5 billion under management and is slightly overweight in commodity-backed currencies.
"That doesn't mean it's not going to grow to be a fine currency when it gets to maturity, but it's not far from entering those difficult teenage years," he said.
Source: Wall Street Journal