Emerging market currencies have soared over the last few months, thanks to a commensurate recovery in investor risk appetite. This trend is on full display in Eastern Europe, where, “The Hungarian currency, which has dropped 14 percent in the past year, has been the best performer in the past three months of the 26 emerging-market units tracked Bloomberg, having advanced 10 percent.” The Polish Zloty, meanwhile, can claim the distinction of best performer against the Euro, having risen 6% in the last month alone. [The chart below, which plots both currencies against the USD, is inverted].

This marks a stunning reversal for these currencies, both of which had fallen by over 40% over the previous six months. Explains one analyst, Poland “is back in favor after Prime Minister Donald Tusk pledged to support the zloty, the International Monetary Fund provided a .6 billion flexible credit line and the country posted the only positive quarterly growth rate among the EU’s 10 eastern members.”

As a result, investors are now pouring money into Poland at an even faster rate than they were extracting it during the height of the credit crisis hysteria. “Foreign investors poured 2.6 billion euros (.7 billion) into Polish bonds and stocks in April and May,” driving share prices up and risk premiums down. Incredibly, Polish assets still remain cheap by most valuation metrics. meanwhile, its currency has yet to erase the gap with its Eastern European counterparts that was opened last fall, and “Brown Brothers Harriman recommends buying the zloty for gains of 7.4 percent by yearend to 69.3 against Hungary’s forint and of 3.4 percent to 6.33 per Czech koruna.”

Speaking of Hungary, it is projected for “Gross domestic product to drop 6.7 percent this year, the most since 1991. Hungary, along with other emerging economies across Europe, has been hurt by a collapse in demand for its exports including Nokia phones and Audi cars. ‘The Hungarian economy is unlikely to recover from the current recession much before 2011.” The Central Bank recently moved to cut interest rates by a whopping 1%, and may cut rates by a further 2.5% before the year is out. investors, evidently, are indifferent to this prospect, and continue to push Hungarian stocks, bonds, and currency back towards the levels of the bubble years.

This disconnect between economic fundamentals and asset prices seems to be playing out throughout the EU. On one front, “Bulgaria and the Baltic states of Latvia, Estonia and Lithuania, also EU members, have had to resist pressure to devalue their currencies as eastern Europe’s recession takes its toll.” According to another source, “Nonperforming loans are rising across the EBRD countries and have doubled in the past year in Turkey, Romania, Ukraine and Albania, according to the EBRD. Recent data from national central banks show commercial banks in Romania are no longer collecting interest on more than 8% of the loans they’ve extended, and the figure is nearing 5% in Turkey, where credit cards are already defaulting at a double-digit pace.” At the same time, the Dow Jones Eastern Europe Stock Index just touched a 10-month high. Go figure.

Governments around the world have committed trillion to supporting failing banks, says the International Monetary Fund.

Governments around the world have committed trillion to supporting failing banks, says the International Monetary Fund.

Forex has become the largest market where exchange of currencies takes place in terms of trillions and trillions of dollars every single day. This is the only market which has this kind of liquidity and which can be traded twenty four hours in a day.

Forex has become the largest market where exchange of currencies takes place in terms of trillions and trillions of dollars every single day. This is the only market which has this kind of liquidity and which can be traded twenty four hours in a day.

We have recently published what we believe is the largest glossary/dictionary in the forex market.

Please let us know what you think of our forex glossary, and if there is any definitions we missed. And if you think we did a good job please show us some love on your blogs, Twitter, etc.

We have recently published what we believe is the largest glossary/dictionary in the forex market.

Please let us know what you think of our forex glossary, and if there is any definitions we missed. And if you think we did a good job please show us some love on your blogs, Twitter, etc.

In the same vein as <a href=”http://www.forexblog.org/2009/07/new-zealand-dollar-rise-threatens-economic-recovery.html”>Monday’s and Tuesday’s posts (covering the New Zealand Dollar and Australian Dollar, respectively), I’d like to use today’s post to look at another commodity currency - the Canadian Dollar. The Loonie, it turns out, has also benefited from the a recovery in risk appetite and concomitant boom in commodity prices; it has appreciated by 7% against the USD in the last month alone, en route to a ten-month high. “All in all, with almost everything going its way these days (besides the crummy weather and the impact on tourism), a <a href=”http://www.theglobeandmail.com/globe-investor/soaring-loonie-fuels-parity-speculation/article1233238/”>return trip to parity - last visited nearly one year ago - doesn’t seem far fetched,” chimes one optimistic analyst.

Like Australia and New Zealand, Canada’s economic fate is tied closely to commodity prices. Simply, as oil and other natural resources have inched closer to last year’s record highs, the Loonie has rebounded proportionately. “Raw materials account for more than 50 percent of Canada’s export revenue. Crude is the nation’s largest export.” Of course, this relationship works both ways. Any indication that the global economic recovery is stalling, and commodities prices would likely tumble, bringing commodity currencies down likewise.

Unlike the Australian Dollar and New Zealand Dollar, the Loonie has never really held much appeal as a carry trade currency. Even at their peak, Canadian interest rates were mediocre, from the standpoint of yield. The current rate is a measly .25%, compared to 2.5% in New Zealand and 3% in Australia. Moreover, while Australia may begin tightening as soon as the fall, “The Bank of Canada committed to keep its key policy rate at the lowest possible level until the spring of 2010,” after voting to hold rates at yesterday’s rate setting meeting. This interest differential could explain why the Aussie has outpaced the Loonie of late.

Another key difference - and potential explanation for the currencies’ recent divergence - is that Australia is considered part of the Asian economic zone, while Canada’s economic fortunes are closely aligned with those of its main trading partner, the US. China, alone, is helping to lift Australia out of recession. The US, meanwhile, is still struggling to find its feet. Hence, it is projected that Canadian GDP will contract by 2.3% in 2009, while Australian GDP may fall by a modest .5%. “When things look bad, you are more likely to sell Canada than the Australian dollar because its economy is moderated by Asian growth,” explains one analyst.

Going forward, this regional differentiation could actually work to the advantage of Canada, which is forecast to grow by an impressive 3% in 2010, compared to 1% growth in Australia. Accordingly, one analyst advises that “investors should sell Australia’s dollar against Canada’s as a ‘relative commodity play’ because an attempt by China to reign in bank lending on concern it may be creating asset-price bubbles could slow Asian growth…’The Canadian dollar should outperform because it is much more closely linked to a recovery in the U.S.’ “

In the same vein as <a href=”http://www.forexblog.org/2009/07/new-zealand-dollar-rise-threatens-economic-recovery.html”>Monday’s and Tuesday’s posts (covering the New Zealand Dollar and Australian Dollar, respectively), I’d like to use today’s post to look at another commodity currency - the Canadian Dollar. The Loonie, it turns out, has also benefited from the a recovery in risk appetite and concomitant boom in commodity prices; it has appreciated by 7% against the USD in the last month alone, en route to a ten-month high. “All in all, with almost everything going its way these days (besides the crummy weather and the impact on tourism), a <a href=”http://www.theglobeandmail.com/globe-investor/soaring-loonie-fuels-parity-speculation/article1233238/”>return trip to parity - last visited nearly one year ago - doesn’t seem far fetched,” chimes one optimistic analyst.

Like Australia and New Zealand, Canada’s economic fate is tied closely to commodity prices. Simply, as oil and other natural resources have inched closer to last year’s record highs, the Loonie has rebounded proportionately. “Raw materials account for more than 50 percent of Canada’s export revenue. Crude is the nation’s largest export.” Of course, this relationship works both ways. Any indication that the global economic recovery is stalling, and commodities prices would likely tumble, bringing commodity currencies down likewise.

Unlike the Australian Dollar and New Zealand Dollar, the Loonie has never really held much appeal as a carry trade currency. Even at their peak, Canadian interest rates were mediocre, from the standpoint of yield. The current rate is a measly .25%, compared to 2.5% in New Zealand and 3% in Australia. Moreover, while Australia may begin tightening as soon as the fall, “The Bank of Canada committed to keep its key policy rate at the lowest possible level until the spring of 2010,” after voting to hold rates at yesterday’s rate setting meeting. This interest differential could explain why the Aussie has outpaced the Loonie of late.

Another key difference - and potential explanation for the currencies’ recent divergence - is that Australia is considered part of the Asian economic zone, while Canada’s economic fortunes are closely aligned with those of its main trading partner, the US. China, alone, is helping to lift Australia out of recession. The US, meanwhile, is still struggling to find its feet. Hence, it is projected that Canadian GDP will contract by 2.3% in 2009, while Australian GDP may fall by a modest .5%. “When things look bad, you are more likely to sell Canada than the Australian dollar because its economy is moderated by Asian growth,” explains one analyst.

Going forward, this regional differentiation could actually work to the advantage of Canada, which is forecast to grow by an impressive 3% in 2010, compared to 1% growth in Australia. Accordingly, one analyst advises that “investors should sell Australia’s dollar against Canada’s as a ‘relative commodity play’ because an attempt by China to reign in bank lending on concern it may be creating asset-price bubbles could slow Asian growth…’The Canadian dollar should outperform because it is much more closely linked to a recovery in the U.S.’ “

Shell sees its profits for the April to June period slump 70% from a year earlier, due to the fall in oil prices since last summer.