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The King of Commodity Currencies

Monday, 10 Sep 2012 | 4:33 PM ET
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The Australian dollar's prospects are brighter than many think, this strategist says - but there's a better game in town.

From the look of things, the Australian dollar is in a bit of a jam. Metals prices are falling and China's economic growth is cooling, both key drivers of the Australian economy - and the strength of the Aussie dollar.

But hold on, say the currency strategists at Bank of New York Mellon . They have noticed that the Australian dollar has been moving less in lockstep with China's outlook or shifts in commodity prices. In fact, they say, "it might be argued that the AUD has become a more versatile currency than a simple ‘China-proxy’ and commodity play."

Not only that, but "with the majors afflicted with deep seated problems in one form or other, there is much to be said of the AUD, whose underpinnings include a fairly solid banking sector and short-term interest rates of 4.5%, as an obvious alternative."

Don't assume the strategists are recommending a contrarian long Aussie trade, though. They are concerned about the currency's relatively volatile track record, and they note that it lost more than a third of its value against the dollar in the second half of 2008, and a quarter against the Canadian dollar.

"With the Euro-area still holding the very real potential for heightened crisis in the weeks ahead, this in itself warrants a currency with less ‘beta’," they say.

On top of that, the strategists are worried about tensions in the Middle East and the potential effect on oil.

"Prices certainly have the potential to mirror the price action when Israeli/Iranian tensions were last building from December 2011 to March 2012," they say. That would likely give the currency of oil-exporting Canada a boost.

All in all, they say, "whilst we understand the views that see the AUD with more to give, the CAD could offer a less fraught passage through any storm."

Food for thought.

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