Commodity currencies from G10 countries, including Australia, New Zealand, and Canada, are facing increasing pressure as fears over the banking sector grow. According to economists at MUFG Bank, risks remain skewed to the downside in the near-term, indicating that commodity currencies may continue to underperform in the coming weeks.
Reasons for Underperformance
There are several factors contributing to the recent underperformance of commodity currencies. Firstly, the ongoing COVID-19 pandemic has led to a decline in demand for commodities such as oil, copper, and iron ore, which are all significant exports for commodity currency countries. This has resulted in a drop in prices, leading to reduced revenues for these countries and weakening their respective currencies.
In addition to the impact of the pandemic, concerns over the banking sector are also weighing on commodity currencies. As global interest rates remain low, banks are struggling to maintain profitability, which has resulted in a number of high-profile bank failures in recent months. This has led to fears that the financial sector may be at risk, causing investors to shy away from commodity currencies.
Near-Term Outlook
The near-term outlook for commodity currencies remains uncertain, with risks skewed to the downside. The ongoing COVID-19 pandemic continues to be a major concern, and any further outbreaks or disruptions to supply chains could lead to additional weakness in commodity prices and currencies.
In addition, the outlook for the banking sector is also a key factor to watch. While many central banks have taken measures to support the financial system, there are still concerns about the health of the banking sector, particularly in countries with high levels of debt.
However, there are some potential factors that could support commodity currencies in the near-term. For example, as the global economy recovers from the pandemic, demand for commodities could increase, leading to higher prices and stronger currencies. In addition, any positive developments in the banking sector could also help to boost confidence and support commodity currencies.
Conclusion
Commodity currencies from G10 countries are struggling amid growing concerns over the banking sector and the ongoing COVID-19 pandemic. While there are some potential factors that could support these currencies in the near-term, risks remain tilted to the downside. As such, investors should exercise caution when investing in commodity currencies and closely monitor developments in the banking sector and the pandemic.
