Commodity currencies are technically vulnerable to a fresh wave

The Canadian, Australian and New Zealand dollar group sits precariously near the extremes of recent ranges. There is potential for a double bottom in all three, but price action today suggests little appetite to buy the trio as recessionary concerns spread.

Copper prices are at a year low, Australian iron ore exports are struggling and crude oil has fallen sharply this week.

On the US dollar side of the equation, the market has cut the terminal rate to 3.5% from over 4%, but the risks are higher in the commodities bloc if growth slows, as this would cause also a run on the US dollar.

CIBC continues to see dollar gains, before a reversal next year:

If you paid close attention to President Powell’s press conference, you noticed that the messaging about how much tightening is needed has changed significantly. Instead of tightening policy to neutral, it’s now about getting policy back to restrictive levels by the end of this year, and saying it loud enough to try and impact inflation expectations. . We ultimately see slowing growth and a turn in inflation as convincing the Fed to move away from what its more hawkish members are now advocating, paving the way for a weaker greenback in 2023. But that won’t be not apparent in the coming months, leaving short-term risks still tilted towards the USD maintaining or even building on its recent gains.

Technically, it’s a similar setup in all three. In May and June, they tested lows but rebounded. The problem is that the last bounce seems to fall flat and breaking a double bottom can get ugly.

It’s a bit hard to imagine from the fundamental side, but a break below 0.6827 would target the 0.6400 area.

USD/CAD continues to flirt with the 1.3000 area, but given the declines in Oil and Natural Gas as well as the bursting of the housing bubble, it could rise higher. The Bank of Canada is also at risk of over-tightening, which could make a recession in Canada particularly hard. This kind of move would target 1.36/37, which is what I asked for.

Similarly, a break down of NZD/USD could take it to 59 or 60 cents.

For now, I don’t think it’s worth betting on a break, but if the recent lows give way in all three cases, it will be a strong and coordinated signal. I expect this to go hand in hand with further declines in commodities and increasing market volatility.