Having warned about increasingly negative sentiment towards the euro, Bank of New York Mellon’s Simon Derrick takes a stab at commodity currencies on Wednesday.
In a nutshell, they are behaving oddly. More specifically, he says, they’re behaving very much like they did ahead of the 2008 mega sell-off.
You see, according to Derrick, it was all very simple at first.
Eurozone jitters from December onwards led to a logical erosion of the store of value in the euro. This saw the euro lose 25 per cent of its value against gold and 21 per cent against oil.
Consequently, commodity-backed currencies like the Canadian loonie and Australian dollar flourished against the euro too. The former was up 17 per cent against the singly currency and the latter up 11.5 per cent. The next in line to benefit were the ‘safety’ currencies of the US dollar and the Japanese yen — both of which saw performances not far short of the CAD, according to Derrick.
The Swiss franc and British pound, however, remained relatively steady or even underperformed the euro. The underperformance of the first though, was largely linked to the Swiss National Bank’s (SNB) strategic policy of keeping the Swiss franc weak.
The thing is, ever since the SNB stopped its intervention path all these patterns of behaviour have changed somewhat, notes Derrick.
As he explains:
Since June 17th (the day that the SNB effectively stepped back from the currency markets), three currencies have stood out as the top performers amongst the majors: the CHF, JPY and GBP (with the EUR losing 3.7% against the first two currencies and 2.9% against the third). In contrast the EUR has fallen just 1.3% against the USD and has actually gained in value against both the CAD and AUD. In line with this it is noticeable that both gold and oil have also fallen in value against the European unit.
But, Derrick says it would be wrong to link the change to the SNB.
As he puts it:
Although it is tempting to believe that the SNB’s move could be a significant factor here (or that China’s shift in currency policy might be a factor as well), its seems to us that the real key to understanding what is happening here is the sudden underperformance of key commodity prices (and commodity linked currencies).
The reason why this matters is that this is exactly what happened in the last quarter of 2008 following the spread of the banking crisis from the US to Iceland, the UK and Europe. Between September 26th and the end of 2008 while EUR/JPY had collapsed by 18% and EUR/CHF by 6%, the single currency had actually managed to climb 13% against the CAD and 12.5% against the AUD.
Over the same period gold held its value (but no more) against the EUR while oil had halved in value. In other words, when the centre of the storm hit investors had little interest in holding anything other than the safest of safe assets. Put another way, it seems to us that the recent and marked underperformance of commodities and commodity based currencies relative to both the CHF and the JPY could be an early warning signal that sentiment is taking a significant turn for the worse in an echo of the way it did in late 2008.
And, of course, it’s not just commodity currencies that are echoing their 2008 behaviour patterns in the market. The Baltic Dry Index — seen as a lead economic and commodity indicator by some — continues its slide.
As Bloomberg reports, the index — which measures the cost of shipping dry bulk goods around the world — registered its longest streak of consecutive losses for almost two years on Tuesday:
The measure fell 35 points, or 1.4 percent, to 2,447 points, according to the Baltic Exchange in London, for a 23rd consecutive reverse. That matched a streak to Aug. 12, 2008, and represented a 42 percent retreat during the current run.
Freight fright *alert* – FT Alphaville
China tightening? Yeah right. – FT Alphaville
Is China on the verge of a commodities unwind? – FT Alphaville
Swiss intervention in context – FT Alphaville