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Why the NZD and AUD are Losing Ground
By S. Wade Hansen, 10 August 2007 The New Zealand dollar (NZD) and the Australian dollar (AUD) both lost ground against the U.S. dollar (USD) today while other currencies---like the Swiss franc (CHF) and the Japanese yen (JPY)---held strong. So why are these currencies losing ground when others aren't? The answer: commodity prices are falling. Most currencies have been losing ground to the USD, but the NZD and AUD have been hit especially hard because commodity prices have been falling for the past two weeks. The Goldman Sachs Commodity Index---a broad measure of commodity prices---is down 6 percent (from 517 to 487). Falling commodity prices have a negative effect on the NZD and the AUD because both New Zealand and Australia are heavy commodity exporters. The cheaper commodities become, the fewer New Zealand and Australian dollars buyers have to use to get the goods. As demand falls, the value of the NZD and the AUD fall with it. Before you run to sell your kiwis and aussies, however, you have to ask yourself if you believe this downturn in commodity prices is going to be sustained or if it is merely a short-term correction. Personally, I believe it is only a short-term correction. Global demand for commodities is not going to wane dramatically in the future. More and more people are consuming more and more goods around the world, and the global expansion is far from over. In the short term, protect any long NZD or AUD trades you may be in (you may even want to move to cash for the time being). Then watch for these two currencies to recover, and jump back into your carry trades.