How Commodity FX is Crumbling

The BOC cut, drop in metals prices and crash in the New Zealand dairy market may usher in a dark period for commodity currencies. The trio fell badly Wednesday while the US dollar led the way on another Yellen reminder that rates are going up. New Zealand CPI is up later. A new CAD Premium trade has been issued, while our EURCAD longs and CADJPY shorts remain intact.

BOC Governor Steven Poloz has repeatedly shown that he's an optimistic leader but he's not stubborn. He admitted the economy has fallen far short of where the BOC expected and responded with a rate cut. The market was split 50/50 but he said it was a relatively easy decision because growth had fallen so far short of estimates.

The BOC said GDP was about 1% below where they expected through Q2 and lowered the full-year forecast to 1.1% from 1.9%, and the 2016 forecast to 2.3% from 2.5%.

The lone solace for CAD bulls was him saying the BOC doesn't believe another move is necessary unless the data or oil prices deteriorate. USD/CAD immediately rose to 1.2930 from 1.2780 on the decision and eventually hit a 6-year high of 1.2958. The crisis high was 1.3063 and is the next (last?) line of resistance. As real money exits CAD, it's likely to be put under heavy pressure in the days ahead.

But CAD only begins to tell the story of an intense news day on Wednesday. Gold fell to the lowest since March and the New Zealand dollar was smashed by a 10.7% in dairy prices at the latest Fonterra auction. NZD/USD hit a 5-year low after the news.

Despite China GDP once again hitting the 7% target, demand for commodity imports is conspicuously absent. In part it shows a shift to domestic consumption but if China isn't supporting demand at this pace of growth, the commodity currencies are extremely vulnerable when the inevitable Chinese slowdown arrives.

In the nearer term, the divergence between Yellen talking about hikes on the same day the BOC cut couldn't be any more stark. The focus is now on the RBNZ, which meets next week.

A major consideration for them will be the 2245 GMT CPI report for Q2. It's expected to show inflation up 0.5% q/q. Also watch as Greek parliament battles to meet the bailout deadline by approving austerity measures.