2009-02-23 12:48 AM
The 147 percent jump in ocean-transport prices is evidence that China's US$580 billion stimulus plan will lift raw materials, said Ihab Salib, who oversees US$3 billion at Federated Investments Inc. in Pittsburgh. That would benefit countries exporting them, so Salib is "actively trading" Norway's krone and Australian and Canadian dollars, nicknamed Aussies and loonies.
Salib and other currency traders have started using the Baltic Dry Index's global gauge of raw-material shipping costs to help make such decisions. The index and the value of a basket of those three resource-rich countries' currencies are increasingly moving in tandem - 96 percent of the time in the past year, up from 84 percent in the past decade, data compiled by Bloomberg show.
"Historically, the Baltic Dry Index is a good leading indicator for commodity prices," said Salib, who declined to detail his investments. "Commodities are very depressed right now, and they offer good long-term value. Once they come back, these currencies should do well."
The shipping gauge is a sign that China's stimulus spending on housing, highways, airports and power grids will have impact beyond its borders. By Feb. 28, it will have spent 25 percent of its stimulus budget, Deutsche Bank AG said Jan. 20, predicting the country's economy will grow at a 12 percent annual rate between the fourth and first quarter, after shrinking 2.3 percent between the third and fourth.
China is the world's biggest consumer of copper and iron ore and has helped each rally this year by about 10 percent, benefiting Australia and Canada, which account for 10 percent of world production of the two metals. Oil, Norway's top export, will average US$66 a barrel in the fourth quarter, up from an average of US$40.62 since Jan. 1, according to the median forecast of 34 analysts surveyed by Bloomberg. China is the world's second-biggest energy user.
"If a China recovery helps to set a floor on commodity prices, it should be an important boost to commodity-linked currencies," said Jim McCormick, Citigroup Inc.'s London-based global head of currencies, in a Feb. 5 report.
So far this year, the krone is the second-best performer among the 16 most-actively traded currencies after Brazil's real, falling less than 1 percent versus the U.S. dollar to 7.0014 by 11:14 a.m. in London. The Australian dollar dropped 8.9 percent to 64.05 U.S. cents. The Canadian dollar weakened 3.6 percent to C$1.2618.
Tracking the index
Goldman Sachs Group Inc. predicts the Australian dollar will appreciate 9.5 percent to 71 cents in six months and the krone will gain 13 percent to 6 per dollar. Though Goldman sees the Canadian dollar little changed at C$1.25, the loonie has tracked the shipping index 72 percent of the time for the past five years.
A comparison of the three currencies' U.S. dollar values and the shipping index shows that the former often follow the latter, which is compiled by the Baltic Exchange, a London maritime organization named for the 18th Century coffee shop to which it traces its roots.
The index hit a 2 1/2-year low on Nov. 7, 2001, following the 9/11 attacks. By eight months later, the three currencies had gained an average of 9 percent. The index peaked at 11,793 on May 20, 2008. By July, the Aussie, loonie and krone all were falling steadily; in the year's second half, they declined 27 percent, 16 percent and 27 percent, respectively. The index's climb to this year's Feb. 11 peak of 2055 followed a 92 percent decline in 2008.
Richard Benson, who oversees US$14 billion in currency funds at Millennium Asset Management in London, said many of his peers "dismissed" the significance of the shipping index when it started falling last year.
"It actually proved to be a very good indicator," Benson said. "When you piece together different bits of information, and the shipping index certainly is one of them, you'll find the market is moving in the same direction. There's huge, huge potential for commodity currencies."
Investors are betting on all three currencies, with net flows into them in the past three months as much as four times stronger than the past year's average, said Samarjit Shankar, global markets strategy director in Boston for Bank of New York Mellon.
Millennium started buying Australian dollars this month and Norwegian kroner in January. Benson predicts that the krone will appreciate 5 percent to 8.30 per euro, and the Aussie will hit 72.50 cents versus the U.S. dollar, with "high 70s quite achievable."
David Tien, who helps money managers at Fischer Francis Trees & Watts oversee funds worth US$29 billion as of mid-2008, said his firm has bulked up on the Aussie and the krone. Eight percent of the currency fund he oversees is in kroner and 15 percent is in Australian dollars.
Tien said the shipping index backs up other evidence that China's stimulus is working, including its loan growth, which reached a record 1.62 trillion yuan (US$237 billion) in January, twice the record set in 2008.
China's "stimulus is really just getting under way," Tien said. "What that means is, within about one month or two months, you are going to see a spur in commodity demand. We think it's a great time" to invest in kroner and Aussies.
A rebound in hard commodities would benefit companies like Stavanger-based StatoilHydro ASA, Norway's top oil producer; Potash Corp. of Saskatchewan in Canada, the world's largest fertilizer producer by market value; and Melbourne-based BHP Billiton Ltd., the world's biggest mining company. Those companies' shares have risen 8.8 percent, 18.7 percent and 4.2 percent, respectively, this year.
A strengthening of the krone, Aussie and loonie would hurt exporters that report in their local currencies such as Melbourne-based Alumina Ltd., a partner in the world's biggest producer of the material used to make aluminum, and Newcrest Mining Ltd., Australia's largest gold-mining company, which returned to profit in the first half as prices of bullion in Australian dollars rose to a record on Feb. 12.