The major economies around the world, like the United States, Europe and China, are slowing greatly.
When this happens, most currencies take it on the chin. Only the defensive currencies, like the yen or franc, tend to fare well during those times.
However, when the commodity-exporting countries take a hit economically, they take a double hit. They take a huge hit because their economy is slowing down just like many of the others. But they also take an extra blow because the major products that they export, and usually make so much money from, are hurt as well. Commodity prices start to take a dive and then the profit margins of these major exporters evaporate very quickly.
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Since this double whammy happens to the commodity currencies (like the Aussie dollar, New Zealand dollar and Canadian dollar), it causes them to generally fall much faster than the euro or pound, for instance.
So this could cause many of the commodity cross pairs to reverse course to the upside such as euro/Canadian dollar, British pound/Australian dollar, etc.
It’s not that the euro or pound is so strong. It’s that these commodity currencies are so weak.
Also, you will likely see Aussie dollar/U.S. dollar or New Zealand dollar/U.S. dollar fall much faster than euro/U.S. dollar, for instance.
Therefore, watch for a lot of momentum and volatility to come in these commodity currencies as stocks sink and commodities continue to fall.
I personally think that we’re going to have a double-dip recession. I think this time also could be really ugly because last time, we had China still chugging along quite strong. That was at least one factor that helped to pull the world out of the global recession last time.
This time, that won’t happen because China is slowing down its economy to try to prevent a real estate bubble there.
I don’t see any large economy around the world that isn’t in bad shape right now.
Therefore, as things continue to get worse and ripple around the world, it will cause a snowball effect that grows ever worse.
The G-8, and even G-20, countries are really going to have their work cut out for them this time — even more than last time.
Since it will take a very long time to get the economic bleeding stopped, I believe you’ll see these commodity currencies fall for at least many months, if not a year or more.
Buckle up. It’s going to be a bumpy ride.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
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