Commodity FX: Growth constraints cap carry – BNY

BNY’s Geoff Yu notes that a less hawkish Fed has weakened the Dollar but failed to spark a sustained bid in commodity FX such as Norwegian Krone (NOK), Australian Dollar (AUD) and Emerging Markets (EM) currencies Chilean Peso (CLP), South African Rand (ZAR) and Brazilian Real (BRL). High nominal rates in Australia and Norway are offset by stagflation and productivity issues, while South Africa’s policy stance reflects a clear global growth priority over carry.

Commodity currencies struggle for follow-through

"Even before last Friday’s payroll numbers, iFlow showed dollar hedges rising again. Mean reversion was already overdue, but the Fed decision and subsequent “credibility” narrative accelerated the process. We have always viewed extreme positioning as an amplifier of price action, and the dollar is adjusting accordingly."

"Gold aside, there’s still no sign of the broad commodity move needed to revive the “debasement” trade that dominated markets in January and February. In FX, we can isolate some of the cleanest commodity currencies: NOK, AUD and an EM basket of CLP, ZAR and BRL. In the full trading week after the Fed decision, there wasn’t a single session when the entire group was net bought; by a week later, aggregate flows were again moving toward net selling."

"The Reserve Bank of Australia and Norges Bank retain the highest nominal rates in G10, but idiosyncratic risks remain too high to generate a sufficient front-end real-rate gap vs. USD."

"Meanwhile, as the Iran conflict has broadly stabilized in market terms, commodity-linked economies are more willing to return to earlier easing paths and prevent real rates from widening again. South Africa is a good example: the Reserve Bank of South Africa surprised markets by holding rates in July and maintained a forward-looking bias, with expectations of weaker inflation opening the door to a policy pivot. The global growth priority is increasingly clear, creating a hard ceiling for carry performance unless the Fed starts signaling cuts."

"Don’t chase the weaker-dollar commodity trade yet. Keep commodity FX and EM duration exposure selective until flows confirm a broader growth recovery, not just easier Fed expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)