Thursday, February 19, 2009

Commodity currencies: follow that ship!

Commodity currencies, those reflecting the commodity exporting character of their host economies, may prove a worthwhile bet over the coming year, according to some traders who gauge the action of the currencies against a leading index of shipping costs.

Bloomberg reports that the recent jump in the Baltic Dry Index (BDI) is signalling a possible follow-through in the strength of major commodity currencies:

"Shipping costs have more than doubled this year, so it may be time to buy kroner, Aussies and loonies.
The 147 percent jump in ocean-transport prices is evidence that China’s $580 billion stimulus plan will lift raw materials, said Ihab Salib, who oversees $3 billion at Federated Investments Inc. in Pittsburgh. That would benefit countries exporting them, so Salib is “actively trading” Norway’s krone and Australian and Canadian dollars, nicknamed Aussies and loonies.
Salib and other currency traders have started using the Baltic Dry Index’s global gauge of raw-material shipping costs to help make such decisions. The index and the value of a basket of those three resource-rich countries’ currencies are increasingly moving in tandem -- 96 percent of the time in the past year, up from 84 percent in the past decade, data compiled by Bloomberg show.
“Historically, the Baltic Dry Index is a good leading indicator for commodity prices,” said Salib, who declined to detail his investments. “Commodities are very depressed right now, and they offer good long-term value. Once they come back, these currencies should do well.”"

We noted the seemingly close correlation between the Baltic Dry Index and Shanghai Composite index some time ago. Maybe our resident currency market watchers have some added insight here as well.

Related articles and posts:

1. Canada's dollar gains on weak greenback - Bloomberg.

2. Commodity currencies and copper prices - Distressed Volatility.

3. John Authers on the bounce in Chinese shares and BDI - FT.com.