As fears of a recession start to settle in, commodity currencies have been on the backfoot despite offering comparably better real rates. Canada has been a particular example of this phenomenon, with its dollar weakening despite a more aggressive rate hiking path than the Fed. The most recent survey of businesses showed further deterioration in optimism, with the majority expecting and preparing for a recession in the coming quarters.
Industrial production prices and in particular raw material prices have been declining, a sign that inflation might be on the way down. At least, some time in the future. The most recent CPI unexpected increased, and the annual rate was above expectations. Nevertheless, the consensus among economists is that the BOC will be looking to slow down its rate hikes.
There is a generalized problem
The shift in expectations from the BOC comes fast on the heels of a similar shift in another commodity Commonwealth country: Australia. The RBA’s softening move at the last meeting caught investors by surprise, and they seem determined to not be surprised by the BOC this time.
Investors are concerned about rising interest rates causing tightness in money markets, as market makers are unwilling to borrow in order to finance investments in falling stock markets. This is forcing central banks, particularly in commodity currencies, to reevaluate their stance on tightening.
Prices are slipping
Australia’s exports have remained steady all year, but the price of commodities have been coming down. Canada is experiencing a similar situation, with the US buying as much crude as possible to make up for Russia being excluded from the market. But, despite OPEC+ cutting production targets a couple of weeks ago, crude prices have been falling.
With less remittances to Canada to pay for exports, the Canadian dollar is less attractive when compared to its neighbor’s currency. Add to that the possibility the BOC might be pulling back on the tightening, there is reason to expect that the loonie will be weaker going forward.
Making things difficult
The problem is that a weaker currency means that imported products become more expensive and increase inflationary pressures. This is particularly relevant for countries like Canada and Australia, because they don’t have the economies of scale to domestically produce a significant amount of consumer goods. It’s even more relevant for smaller countries, such as New Zealand.
Higher inflation coupled with increased borrowing costs would be expected to undermine consumers, which would put the economy more at risk, further weakening the currency. Commodity currency traders, therefore, would do well to be particularly interested in retail sales figures from their respective countries.
Canada reports September retail sales tomorrow which are expected to drop to 6.5% growth compared to 8.0% prior. Reminder, Canada’s annualized inflation in that period was 6.9%.
