Fed May Impact on Commodity Currencies

All eyes will be on the U.S. Federal Reserve’s meeting this week but it will be especially crucial for battered commodity currencies hoping for respite from a weaker greenback.

The Fed isn’t likely to move on interest rates at Wednesday’s meeting, but markets are hotly awaiting the post-meeting comments for hints on whether the central bank will raise rates in September. Should that happen, the dollar could see another burst of strength and put further pressure on commodity-exporting nations like Australia, Canada, New Zealand, Brazil and Indonesia, who are hoping that Fed Chair Janet Yellen will sound a cautious tone and pause the sell-off in those currencies.

Australian exports are dependent on iron ore, New Zealand relies on dairy products and energy makes up the bulk of Canadian, Brazilian and Indonesian exports. Therefore, a sharp tumble in prices of energy, gold, dairy and metals combined with a stronger dollar, a weakening Chinese economy and bets on looser monetary policy – excluding Brazil where rates remain high – have seen commodity bears out in full force in recent weeks.