Monday, March 23, 2009

Return of the resurging $A

Most commodities made ground last week, although for Australian producers the benefits were eroded by strong gains in the $A.

Last week’s trading illustrates a key risk for Australian producers moving forward – one that ProFarmer has been warning its subscribers of. As the global economy gets back on its feet –money will pour out of US Treasury Bonds searching for better yields. This would see the $US start to weaken again, creating demand for commodities to offset the inflationary impacts of $US weakness and demand for commodity related currencies such as the $A. Last week the $A gained about 5USc (8%) on the back of a 8-10% rise in commodity prices.

This is more or less the same cycle of events that saw commodities post multi-decade highs last year. But much has changed since last year. Markets have deleveraged significantly, the hype has gone out of commodity fund investments (forecasts of $200/barrel oil prices now look foolish), physical grain stocks have been rebuilt and nearby demand has been seriously damaged.

But at the same time markets have been primed with lots of liquidity and the US Government has reinforced its support for bio-fuels – sending signals that it is prepared to do whatever it takes to protect this fledgling industries, including increased blending mandates. So never say never!

A resurgent $A poses a key risk to better returns moving forward. Over the past couple of weeks, despite good gains internationally, local grain prices have been flat-lining with gains virtually totally offset by the appreciation in the $A.
A key challenge in the coming year will be to manage $A exposure so that a rapidly appreciating currency does not erode commodity price gains. We will be watching the $A and looking to take some cover on any major dips.

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