Once the lockdown is over, we get the chance to catch up on months of sitting at home with going out, partying and holidays. In equity markets, the party has even started already. In the Netherlands, for instance, the AEX has been up since the end of October increased by over 27%. This makes the Netherlands by no means an exception, as stock market gauges in very many countries shot up by 20% or more.
Investors have thus made a hefty advance on the huge boost to the economy once the virus comes under control. However, this does not apply to the currency world. There, prices are mainly driven by trade flows and interest rates. That said, opportunities do exist for currencies when economic growth picks up soon.
Booming economy
A booming economy needs more raw materials. It is therefore obvious that commodity prices to rise further during the year. In fact, some commodity currencies have already started an advance. Australia, as the world's largest supplier of iron ore, has already seen its currency exchange rate rise by over 25% against the US dollar since the end of March.
The New Zealand dollar is being sucked into the rally. Although the country does not dig up metals or other commodities, dairy and (sheep) meat exports are a major source of income. The rise in dollaridoo and the kiwi, incidentally, is caused only to a limited extent by growing commodity demand. Equally important, both countries' economies are much less affected by the Covid-19 pandemic than the US one.
Interest rates down
Other commodity suppliers are not so lucky. Despite rising prices of iron ore, oil and more commodities, the Russian rouble and Brazilian real, for example, have fallen in recent months down by over 5% against the US dollar. This is mainly because other issues take the spotlight in the price movements of these currencies. For instance, both countries have been hit relatively hard by the Covid-19 pandemic.
Brazil has a huge package of measures unfolding to keep the economy on track, while the central bank lowered the interest rate to its lowest ever level: 2%. Russia was hit by the sharp fall in oil price. Under normal circumstances, the Russian central bank would have raised interest rates substantially to prop up the rouble. In 2015, for instance, interest rates went from 5.5% to 15% within a few months. But that was not an option now due to the Covid-19 woes. The current interest rate of 4.25% is barely above inflation.
Catch-up for ruble and real
Yet sometimes it takes very little to boost a commodity country's currency. The South African rand is a case in point. This currency shot up by over 20% up. This is due not only to large exports of gold and other commodities, but more importantly to the prospect of the country presenting a balanced budget next Wednesday, February 24.
When the economy soon picks up and commodity prices rise further, Russia and Brazil will also have more room to put their fiscal house in order. Once iron ore, copper and other industrial raw materials following the stock market rebound due to the economic recovery, the ruble and real could potentially catch up nicely.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
