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Commodity currencies defy oil weakness

Commodity currencies defied weakness in the price of oil and rallied against the dollar, amid a combination of stronger economic conditions and becalmed investor sentiment towards the greenback despite this week’s widely expected rise in US interest rates.

The Swedish krone and the Canadian currencies rose 0.6 per cent, while the Norwegian krone, the Russian rouble and the South African rand also made gains.

Crude oil again fell on Tuesday on another rise in Opec’s output, but other factors in the countries of commodity countries are gaining more investor attention.

Higher than expected inflation in Sweden during May pushed up the krone against the dollar and the euro, while the Nokkie was boosted by surveys reporting rising output in regions of Norway.

Rate divergence has been one of the reasons behind US dollar strength at the start of the year, with the Federal Reserve out on its own in normalising rates. Investors were therefore caught by surprise by hawkish comments on Monday night from the Bank of Canada’s deputy governor, which have raised the possibility of a rate increase sooner than envisaged.

At the same time, markets have all but priced in a US rate rise at Wednesday’s Federal Open Market Committee meeting, making chair Janet Yellen’s comments on the US economy and the reduction of the balance sheet key to the dollar’s next moves.

Bank of America Merrill Lynch said it expected the FOMC meeting to have “dovish undertones”, Ms Yellen to sound cautiously optimistic and the impact on the dollar to be muted.

But Peter Rosenstreich, currency strategist at the online bank Swissquote, said there was “plenty of room for a hawkish Fed to trigger the outsized bearish dollar position race for the door”.

Stronger economic data in the G10 are causing some reappraisal of currency valuations. Lee Hardman, currency analyst at MUFG, said the market had been overly pessimistic about the Canadian dollar in recent months, partly triggered by concerns about renegotiation of the North American Free Trade Agreement.

The other dollar bloc countries are also getting a favourable wind from the forex market. Stronger GDP has helped the Australian dollar rise 1.7 per cent since the start of the month, while the New Zealand dollar has also been gaining ahead of this week’s GDP and current account data.

However, National Australia Bank warned the Aussie dollar’s rally would not survive any meaningful recovery in the US dollar, although it said the kiwi was returning to fair value, driven by higher commodity prices and higher risk appetite.

General demand for emerging market assets are helping currencies such as the rouble and the rand, said Caroline Gorman at GAM, despite other factors working against them.

“Considering oil has dropped again in June, the Russian rouble is holding in reasonably well,” said Ms Gorman, while the rand has managed to brush aside political uncertainty.

“The market is assuming a dovish Fed hike, and a muted dollar reaction, both of which we would expect to be supportive for emerging market assets, including EM FX,” Ms Gorman added.