[LONDON] Falling prices for crude oil and Chinese stocks drove higher-yielding, commodity-linked currencies to multi-year lows this week - good news for their central banks aiming to boost exports but bad for investors seeking alternatives to a struggling euro.
The Australian, Canadian and New Zealand dollars and the Norwegian crown have all taken a hit as the gut-wrenching slide in Chinese shares raised fears over growth in the world's second-largest economy and global demand more generally.
While the stock slide has stabilised after unprecedented support from Beijing, expectations of more interest rate cuts by those countries are likely to see the currencies fall further, analysts say. "Commodity currencies are not having a good time and investors should probably stay away as there is still some room for them to fall," said Jeremy Stretch, head of currency strategy at CIBC World Markets, a Canadian bank.
Australia, New Zealand, Canada and Norway are major exporters of commodities ranging from food to iron ore to oil. China, which reports second-quarter growth figures on Wednesday, is the biggest export market for Australia and New Zealand.
To counter slowing demand, their central banks have cut interest rates to weaken their currencies and support exports.
How low can they go? Central bank policy easing in 2015 The New Zealand dollar has lost nearly 14 percent in the past six months to hit a five-year low of $0.6620 and the Australian dollar has shed 9 percent to a six-year low of $0.7372, with no immediate change in sight.
"The New Zealand dollar can drop to the low $0.60s, $0.72 for the Australian dollar and C$1.30 for the Canadian dollar,"said Stretch at CIBC World Markets.
This will be unwelcome for investors such as sovereign funds looking to diversify out of the usual, more liquid currencies like the euro, yen and the British pound, which offer yields that are close to zero.
And in another blow to commodity producers, the International Monetary Fund trimmed on Thursday its global growth forecasts for 2015 and warned about further appreciation in the US dollar.
The Bank of Canada meets next week, and expectations are growing it will lower rates after a string of disappointing data raised the spectre of recession.
Less than two weeks ago, economists had been expecting the central bank to remain on hold after it surprised markets in January by cutting rates 25 basis points, a reduction intended to help ease the effect of falling crude prices.
The shift in sentiment has been reflected in positioning, with speculators turning to net shorts in the Canadian dollar from holding long bets in recent weeks, data from the Commodity Futures Trading Commission showed.
Speculators are also increasing their bets against the Australian dollar as prices of iron ore, a major Australian export, heads lower. In addition, the recent volatility in China's stock market poses a threat to the Aussie, often used as a liquid proxy for exposure to China.
"We see commodity-producing countries such as the Reserve Bank of Australia, the New Zealand central bank and the BOC as potentially having to cut rates in the coming months and are bearish on these currencies," said Jane Foley, senior currency strategist at Rabobank.
In the options market, investors are betting on more losses.
Risk reversals-a gauge which shows of demand for options on a currency rising or falling-show a bias for Australian, Canadian and New Zealand dollar puts, or bets they will weaken.
In the past two weeks, the one-month dollar/Canadian dollar risk reversals has risen to 0.6 vols in favour of US dollar calls from around 0.4 vols. Similarly, risk reversals for one-month Australian and News Zealand dollars puts have risen.