Where Will the 'Commodity Currencies' Head Next?

by: Kathy Lien

Gold and Oil prices are plunging, triggering a 400 pip slide in the Canadian dollar from Friday’s high, a 300 pip drop in the Austrailian dollar and a 200 pip decline in the New Zealand dollar.

Could the commodity currencies fall further? Yes.

According to the Baltic Dry Index charts below, commodity prices will continue to fall. For those of you who do not know what the Baltic Dry Index is, it was once termed the “Best Economic Indicator You’ve Never Head Of” by Daniel Gross. This index is closely followed by all Wall Street Insiders because it is a good indicator of economic growth and production. In a nutshell, the BDI reflects how much it costs to ship raw materials (like coal, iron ore, cement and soft commodities like grains and sugar) by sea. The level of this index is also impacted by fuel costs, fleet numbers and seasonality but if the index rises, it means that demand is generally strong causing other ports to be congested.

The following charts show that the BDI is declining and could continue to decline. According to the log charts of gold and oil, the decline should steepen not only for commodity prices but also for the Australian, New Zealand and Canadian dollars. This dovetails well into my belief that carry trades will continue to suffer.