This month’s five best performers among 16 major exchange rates are all affiliated with resource-driven economies as investors unwind bets on declines versus the dollar. Brazil’s real leads with a 4.1 percent gain, while a Bloomberg index of seven commodity currencies has rallied 1 percent from last month’s 2.9 percent slide, which was the most since 2011.
The resilience of commodity-linked currencies comes as growth stalls in China, which buys everything from New Zealand’s milk to Brazil’s iron ore, suggesting a delinking from the world’s second-largest economy. Strategists are raising their forecasts after the dollar fell against all but one of its most-traded peers in February and as Citigroup Inc.’s U.S. Economic Surprise Index touched the lowest in more than seven months.

“Investors came into this year thinking they knew the story -- that U.S. data would be good,” Steven Englander, the global head of Group-of-10 currency strategy at Citigroup in New York, said in a Feb. 25 phone interview. “Those expectations were very badly disappointed, and now short commodity-currency positions have to be unwound.” A short position is a bet an asset will decline in value.
Citigroup increased in February its year-end estimate for the Australian dollar to 91 U.S. cents, from 85 last month. The second-biggest currency trader also sees New Zealand’s dollar rising this year, to 85 U.S. cents. The Aussie bought 89.58 U.S. cents and the kiwi 84.08 cents as of 8:48 a.m. in London.

Commodities Jump

The Norwegian krone strengthened 3.8 percent versus the dollar this month, the most among major currencies after the real and kiwi, which rose 4 percent. Rounding out the top five, South Africa’s rand appreciated 3.8 percent and the Aussie was up 2.4 percent.
Economists are rushing to keep up with the moves, boosting first-quarter forecasts for the rand, real, kiwi, Canadian dollar and Chilean peso by an average of 1 percent since the start of the year, according to data compiled by Bloomberg.
Commodities, which are priced in dollars and tend to rise as the currency cheapens, have jumped in February. The Standard & Poor’s GSCI Official Close Index has advanced 4.1 percent, its biggest gain since July, while crude-oil futures climbed 4.7 percent, touching a four-month high of $103.80 per barrel in New York on Feb. 19.

Chinese Slowdown

Citigroup’s Economic Surprise Index for the U.S. fell to minus 14.6 on Feb. 25, the lowest since July 15, as economic data from jobs and manufacturing to retail sales trailed forecasts. The gauge’s average over the past year is 17.
China is seeing signs of a manufacturing slowdown, with a gauge of factory output missing economists’ forecasts on Jan. 29, a week after an initial estimate triggered the biggest developing-nation currency slump in five years.
China’s $4.8 trillion of shadow-banking debt, which occurs outside the regular banking system and often beyond the control of regulators, also raises concern that economic shocks will cloud the growth outlook for a country that’s the biggest trade partner for Australia, Brazil and South Africa. The currencies of those countries have increased by an average of 3.4 percent against the greenback in February.

Risk Appetite

“People are dismissing any uncertainties about China,” Dan Dorrow, the head of research at Faros Trading LLC in Stamford, Connecticut, said in a Feb. 26 phone interview. “They’ve got confidence that global growth will gradually accelerate, which is a risk-positive scenario that’s particularly good for commodity currencies.”
Declining volatility has reduced the risk of unexpected price moves, making it more difficult for traders to make money in foreign exchange and prompting them to more aggressively seek the higher yields offered by commodity-linked assets.
JPMorgan Chase & Co.’s Global FX Volatility Index fell to 7.64 percent on Feb. 25, the lowest close since Oct. 28 and down from a 2014 high of 8.98 percent on Feb. 3. Average implied volatility for the seven commodity currencies included in Bloomberg’s index fell on the same day to the lowest level in more than five weeks.

‘Key Driver’

“The stability that we’ve seen in foreign-exchange markets in February has been a key driver for emerging-market or commodity currencies,” Hamish Pepper, a currency strategist at Barclays Plc in Singapore, said in a phone interview yesterday. “Commodity currencies have a correlation with risk appetite. Whenever you get periods of stability and improving sentiment, these are the currencies that historically do well.”