Dollar falls as weak commodity prices, earnings fears stoke risk aversion

Thursday 9th July 2009

The New Zealand dollar fell as weaker prices for raw materials and rising concerns about the US corporate earnings season stoked investors’ aversion to higher-yielding, or riskier, assets.

Crude oil dropped about US$3 a barrel, pacing a slide in commodity prices, as OPEC cut its forecasts for demand while US data showed an increase in inventories, and a Chinese buyer of Australian coal walked away from the deal, prompting investors to exit the Australian dollar, which dragged the kiwi down.

Fears of a weak second-quarter earnings in the US encouraged investors to eschew riskier assets and helped the yen rally against the greenback. The Reuters/Jefferies CRB Index, a measure of 19 commodities, fell 2.3%, while the Chicago Options Exchange Board’s Volatility Index, or VIX, gained 3.3% to 31.30.

“There’s plenty of risk aversion around, and the yen found support on safe haven demand,” said Philip Borkin, economist at ANZ National Bank. “Commodity markets took a hammering on the back of the coal story,” which saw a fall in the trans-Tasman currencies, he said.

The kiwi dropped to 62.66 US cents from 62.86 cents yesterday, and fell to 59.53 on the trade-weighted index, or TWI, a measure of the currency versus a basket of five trading partners, from 59.66. It slipped to 58.14 yen from 59.22 yen yesterday, and was little changed at 45.13 euro cents from 45.09 cents. It gained to 80.38 Australian cents from 79.79 cents yesterday.

Borkin said the currency may trade between 61.85 US cents and 62.95 cents today as investors continue to be wary of commodity currencies such as the kiwi, and he wouldn’t be surprised to see it fall below 60 cents “in the next few days if risk sentiment remains negative.”

Alcoa Inc., the largest US aluminium producer, kicked off the earnings season with a smaller-than-expected loss of US$454 million in the three months ended June 30. Companies on the Standard & Poor’s 500 index are expected to show a decline in profits of some 34%, according to Bloomberg.

Leaders of the Group of Eight nations met in Italy yesterday, but failed to make mention of China’s call to debate the status of the reserve currency after Chinese President Hu Jintao had to return home amid ethnic unrest in the north west of China that has killed 165 people.

The leaders said it was too early to begin planning exit strategies, but German Chancellor Angela Merkel said “with luck, we have reached the bottom,” according to Reuters.

The International Monetary Fund’s world economic outlook update predicts the global economy will shrink 1.4% this year, deeper than previous forecasts, but grow 2.5% next year, stronger than its 1.9% estimate.

Australian labour data out today could move the foreign exchange market today, with a surprise either way likely to push the kiwi dollar around, according to Borkin.

ANZ National Bank economists predict the Australian economy shed 32,000 jobs in June, with the unemployment rate rising to 5.9%. Employment has remained resilient across the Tasman as the economy managed to avoid a technical recession.

Businesswire.co.nz

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