Dollar's Decline Puts Spotlight on Battered Commodity Currencies

Commodity Currencies: An Opportunity Amidst Dollar Weakness

A few smart investors are turning their focus on the weak currencies of countries that produce commodities, such as Norway and Australia, to take advantage of the possibility of weakness for the US dollar. The dollar's value is slipping because of indications that there is a possibility that Federal Reserve might conclude its rate-hiking cycles.

Throughout the year, many commodities currencies have faced difficulties with the rising cost of crude oil and other raw materials falling from their peak in 2022. Expectations of central bank efforts in fighting inflation will negatively affect the global economy and decrease the need for exports of commodity products, contributing to the difficulties that these currencies have faced.

Sources from Reuters

But, the overall economic performance of the U.S. and some other countries has been resilient, which has led some strategists to conclude that a global economic recession is unlikely. Although this has triggered rallies in risk assets, such as the stock market, prices for raw materials, and certain commodities currencies, they have not been able to react.

But, smart investors view this as a chance to purchase at a lower price. In addition, the expectation that the Fed's rate hikes that helped to push the dollar towards a record high of two decades last year makes it more attractive.

The Bullish View on Commodity Currencies

The last few days have witnessed a rising optimism for commodities in light of China's commitment to increase policies to support the country's economy. China's top commodity buyer's decision led to a surge in copper, oil, and other raw materials. In turn, commodities currencies such as that of the Australian as well as New Zealand dollars experienced a rise in their value.

In contrast, the dollar could suffer further losses if Fed declares that it believes U.S. inflation will continue to slow, which makes future rate hikes less likely. Although a rate hike of 25 basis points is likely to occur at the end of the meeting on Wednesday, many investors believe the probability of another rate increases to be low.

Identifying Opportunities Amongst the Laggards

Although some commodities have shown significant strength against the dollar in recent months, investors with bullish views are looking for potential winners from the losers. The Norwegian crown is the second most underperforming G10 currency against the U.S. dollar this year and has seen a drop in the region of 3% when compared to the greenback. The reason for this is attributed to the lower oil prices as well as an ailing central bank that previously increased rates but at a lower speed.

Other commodities have suffered similar losses in value, including the New Zealand dollar, down 2 per cent, as well as the South African rand, down 3 per cent.

Currency Valuations and Potential Upsides

A valuation of currencies carried out by Deutsche Bank, which considers aspects like trade terms and gross domestic product, shows it is the Norwegian currency is valued below its counterpart, the U.S. dollar, by over 30 per cent, while the Australian dollar is approximately 20 per cent undervalued.

Based on Thanos Bardas, a senior director of portfolios at Neuberger Berman, The Australian dollar might appreciate if the global economy grows faster than expected and commodities prices increase. The International Monetary Fund saw positive signs slightly raised its global growth estimates for 2023.

Even though commodity currencies can provide an opportunity to profit from the dollar's weakness, there are other options to take advantage of this. Deutsche Bank's research suggests that the Japanese yen, which decreased 7% against the dollar due to the Japanese Bank's extremely low rates, is one of the world's most undervalued currencies compared to the dollar.

Bipan Rai, North America head of FX strategy at CIBC and CIBC, has also suggested that valuation models show that there is an overvalued U.S. dollar. He says the dollar is undervalued compared to currencies such as the Japanese euro, yen and British pound.

Caution and Risks

Experts recommend against basing your decisions solely on the value of a property to make transactions in the currency for short periods, as the value of currencies may fluctuate from their true value when they are used for long durations. In addition, putting your money on the dollar comes with a risk of its own. It is possible that the U.S. currency could rebound in the event of persistent inflation or should the Fed decides to adopt a more cautious policy than what investors expect.

Despite possible risks, Some strategists think there's plenty of room for other currencies to increase in value. Jane Foley, head of FX strategy at Rabobank, is optimistic about the perspective on the currency of Sweden as well as Norway. Foley says that their depreciation and the possibility of signs of strength for the economy in these nations could further increase the value of their currencies.

While the decrease in the dollar could cause concern to some people, it allows investors to profit from the positives of battered commodities currencies. Always be cautious and thorough analysis are crucial in navigating the ever-changing world of forex.