A simmering mix of a strong U.S. dollar and weak commodity prices may be brewing up trouble for junk bond exchange-traded funds (ETFs) with a hefty weighting in materials companies.
"If the U.S. dollar stays strong, that will exacerbate the impact of the weaker commodity prices" on miners' cash flow and the ability to meet debt payments, said May Zhong, a credit analyst at Standard & Poor's.
Coal companies, especially U.S.-based ones competing in the export market, are a particular concern, she said. Faced with oversupply, thermal coal prices have fallen to near five-year lows, while the U.S. dollar index has risen as much as 8.3 percent so far this year.
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But Australian miners may also take a hit, she said. "The Australian dollar hasn't fallen to the same extent as major commodity prices. It's still relatively strong compared to the U.S. dollar," she said.
"You do need a weak local currency to help those [B-rated] miners or shield them from weaker commodity prices," Zhong said.