The overall sentiment and the direction of where commodities generally move influence the commodity currencies. This is largely because their economies are significantly affected by the ebb and flow of commodities as these countries are rich in natural resources.
Focusing on the Australian dollar (Aussie) and the New Zealand dollar (Kiwi), I would note that some appreciation could have to do with positive carry trade rates in these two nations being much higher than most. In Australia, the current interest rate is 3.5%; for the Kiwi in New Zealand, the interest rate is 2.5%. Since 2009, the trends have been appreciably higher in both of these crosses, with gains in the Aussie high to low of more than 80% and in the Kiwi, just a shade below at 75%.
Currently, having gained a bit more than 8% in the last four months, the Australian dollar is overbought. I have a seller's mentality because I feel a number of commodities are due for a move lower. These include, but are not limited to, agriculture, energies and metals. Another major consideration is with China's insatiable demand slowing for commodities, which could lead to a price reduction as demand falls off. This is for longer-term trades, but I do think that heading into next year, we could see prices depreciate in the neighborhood of 15%-20%.
Having gained traction in recent weeks, the New Zealand dollar is within 1.5% its 2012 highs. Like the Aussie dollar, prices have reached overbought levels and I believe there is risk to the downside. I do not see a trade above $0.88, which was last year's high. I open the opportunity to sell this cross for the same reasons I want to sell the Australian dollar. In terms of targets moving forward, I see the first support at $0.73. However, I expect a trade to the upper $60s into next year, which would represent a loss of nearly 20% from current levels.
Both of these currencies can be traded with futures and options on the Chicago Mercantile Exchange (CME).
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