Oanda Market View: Focus on Commodity Currencies

Comments from Dean Popplewell, Director of Currency Analysis and Research at OANDA.

“The yellow metal is trying very hard to lose all its shine. Capital Markets have been consumed with commodity price moves over the past-two sessions – attribution for gold’s two-day break is given to a huge sell order (+400-tonnes) from last Friday. Not helping matters and providing a significant dent to investors risk psyche was the below expectation GDP growth figures from China over the weekend. Has the market been able to break the commodity bulls back? Not yet broken, but very much strained as major weekly support now appears at $1,3250 and resistance topside above $1,413 and $1, 436.”

“Two of the U.S’s biggest foreign creditors parted ways in February. China’s U.S Treasury holdings increased by +$8.7-billion to +$1.27-trillion while Japan was a net seller of U.S product, cutting its inventory by -$6.8-billion to +$1.097-trillion. Do not be surprised to see Japanese market dynamics change over the coming months after the BoJ’s governor Kuroda unleashed an aggressive easing monetary policy last week. The market now expects domestic JGB holders to cash out their own bonds and seek higher yield solace in U.S treasury’s and other high-grade foreign bonds. Japan could potential dethrone China as the largest foreign owner of US Treasury bonds.”

“The market needs to keep a closer eye on UST/JGB spreads for dollar direction. From last week they have narrowed sharply on the back of weaker US data. Despite the BoJ’s focus on longer dated securities, the narrowing on the long-end (30′s -29bps) remains out of order with the markets bullish expectations for USD/JPY. The timing for 100-dollar yen is not soon, so with narrowing spreads along the curve and with a market biased long USD/JPY there is an argument for some further correction and the G20 meeting scheduled for later this week is a good enough of an excuse to want to pare some of their short yen positions.”

“The commodity currencies continue to have problems deciding their fair value. Despite a delayed broad sell off of risk sensitive assets after weaker than expected China growth headlines and commodity prices plummeting, currencies like the loonie and AUD seem to be well contained, surrounded on both sides with ‘few’ market orders. The negative fallout for the loonie in particular could be somewhat negated by the BoC in tomorrow’s session. The Bank du Canada has its policy statement announcement on Wednesday. If Canadian policy makers retain their mild tightening bias of late can only be bullish for the coin with the ‘loon’.”