Bullish on the Commodity Currencies

The US dollar has seen a significant pullback since early November and has failed several attempts at recovery moves. With the CPI and December FOMC meeting coming next week, the dollar could have another rebound, particularly if the Fed’s post-meeting statements maintain a hawkish tone. If this happens, it may present an opportunity to approach the long side of the Canadian and Australian dollars, commonly known as the “Commodity Currencies.”

While the US employment situation remains strong, there has been a notable pullback in US inflation readings over the past few months. Friday’s US PPI and core PPI numbers were higher than trade forecasts but marked the fifth month in a row that their year-over-year rate of increase declined. While the jury is still out on whether the FOMC will hike rates 50 or 75 basis points on Wednesday, there is evidence to suggest that the Fed will have their final rate hike for this cycle early next year.

Although other major economies are starting to see their inflation readings fall as well, many are still close to multi-decade highs. This could keep those central banks in hawkish policy stances beyond any shift in the Fed’s policy to neutral. This would give those currencies an additional advantage over the Dollar.

This should benefit the commodity currencies, particularly if other factors come into play. China is showing signs that it will further relax its Covid Zero policies. This could strengthen the Australian dollar, as that nation is a major exporter of commodities to China. The Bank of Canada signaled that they are close to finishing their rate hikes at Wednesday’s meeting, but the Canadian dollar would also benefit from a broad-based rally in commodity prices.

Australian CPI
Year over Year % Change By Quarter

Originally Published December 9, 2022

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