Some currencies get hit

WORLD / Wall Street Journal Exclusive

 Some currencies get hit
By KAREN RICHARDSON (WSJ)
Updated: 2006-09-26 08:53

http://online.wsj.com/public/article/SB115914559204772688-0m2443zwI_zIcmJik
JciOhkFSz0_20061001.html?mod=mktw

As prices for oil, gas and metals take a hit, they are giving the
countries that produce these commodities a run for their money.

The currencies of countries like Canada, Australia and Chile -- sometimes
called "commodity currencies" because they are so heavily supported by
the export sales of natural resources -- are starting to fall as
commodities prices wobble off recent highs.

Since peaking in mid-May, the CRB index, a broad measure of the
performance of commodities compiled by the Commodity Research Bureau, has
fallen about 15%. Oil is down 21% from its high on July 14, while natural
gas is down 59% in 2006. Gold, while up 14% for the year, is down about
18% from its 12-month high. Copper is off about 14% since May.

All of this stems from hints of slowing growth in the U.S. economy, which
translates to less demand for energy and other commodities. Last week,
the stock market closed lower as investors fretted over
softer-than-expected economic data. In an unexpected twist, hedge fund
Amaranth Advisors reported big losses after betting wrong on natural gas.

The broader market shrugged that off, but the Dow Jones Industrial
Average -- which until recently was approaching record levels -- still
fell 52.67 points, or 0.5%, during the week to 11508.10, leaving it up
7.4% for the year.

Investors have done well buying shares of natural-resources companies
like miners and loggers for the past five years. But with the commodity
boom looking shaky, nervousness has risen. Also, concern about
speculators exiting these markets could cause more havoc.

Will commodity prices bounce back soon? A look at commodity currencies
would indicate that such a surge isn't likely anytime soon.

"The next five to six quarters are going to be tough," says Abhijit
Chakrabortti, head of global investment strategy at J.P. Morgan Chase &
Co. "Where you could get a lot of concern is Canada and Australia."

Adding to the vulnerability of these main commodity currencies is how
speculators such as hedge funds trade in the foreign-exchange markets.
Often, they use complex derivatives that can be difficult to sell in
volatile markets. When faced with selling pressure from either
redemptions or margin calls, these investors are more likely to dump
their actual currency holdings than the derivatives, because it is easier.

"There's infinitely more liquidity in the currency markets," says Robert
Kowit, head of global fixed-income investments at Federated Investors Inc.

The Canadian and Australian dollars, up about 42% and 48%, respectively,
since the end of 2001, have edged off their highs in the past few months.
The Canadian dollar, called the "loonie" because the dollar coin features
the common loon, has softened about 1.7% since hitting a high June 12 at
just under 1.10 to the U.S. dollar. The Australian dollar has fallen 2.6%
to just under 76 U.S. cents from its high of about 78 cents on May 11.

Booming energy prices have helped support the loonie, and Canada sells a
great deal of natural gas and oil to the U.S. Many analysts agree that
Canada, at least in the short term, could be hit hard if the U.S. economy
slows significantly during the next 12 months. Canada relies on selling
oil, lumber and cars across the border, but its merchandise trade surplus
shrank in July to its lowest level in more than three years.

The loonie's day in the sun may not be over, though. Analysts say it will
strengthen again over the longer term -- assuming the U.S. growth cycle
starts again in about 18 months. That is because of Canada's wealth of
natural resources, especially oil and natural gas, which will continue to
be in high demand for years to come.

"Canada has such a strong fundamental bid to its currency that it's hard
to see the loonie falling very far," says Carl B. Weinberg, chief
economist at research firm High Frequency Economics. "It doesn't mean
people can't get killed on a day-to-day basis, though."

John Rothfield, a currency strategist at Bank of America, estimates the
Canadian dollar will end 2006 at the current rate of about 1.12 to the
dollar but will strengthen to about 1.09 to the dollar -- its 12-month
high -- by the end of 2007.

The Australian dollar has a similar outlook. Highly exposed to base
metals and precious metals due to its big mining industry, the Australian
economy is poised to feel pressure if commodity prices fall further. The
Journal of Commerce's base-metal index has fallen about 4% since July and
is expected to fall an additional 10% over the next several months,
according to Sue Trinh, a currency strategist at RBC Capital Markets in
Sydney.

"That would limit the Aussie to go higher," Ms. Trinh says. She argues,
however, that Australia's proximity to fast-growing China makes its
long-term promise greater than Canada's.

In Latin America, high copper prices helped to push the Chilean peso up
about 22% against the dollar since the end of 2001. Recently, economic
growth has slowed as copper prices have fallen, prompting the Chilean
central bank to lower its forecast for 2006 gross domestic product.

The peso, which in December reached about 510 to the U.S. dollar, has
weakened to about 540. Bank of America expects it to soften to 570 in the
first quarter of 2007 before ending at about 560 by the end of next year.

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