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What You Don’t Know About Com-Dolls

Sean Hyman (July 28, 2009)

Tuesday, July 28, 2009

Also In Today’s Letter…

By Sean Hyman Even though commodity dollars (or “com-dolls”) come from nations all across the globe, they all tend to track commodity prices in some way.

As such, traders often view commodity dollars as a group. They expect the traditional commodity dollars to react pretty much the same to various trends. That includes the Aussie dollar, New Zealand dollar, Canadian dollar and Brazilian real (not really a “dollar” but often grouped with “com-dolls” anyway because of Brazil’s rich natural resources).

But in reality, that’s only part of the story. Yes, it’s true that commodity dollars tend to follow the same general direction, but the returns on buying on selling the various commodity dollars can be vastly differently.

This baffles many traders. So let me explain why this happens.

First, let’s take a look at the performances so far of some of the “com-dollars.” Hmmm, the Brazilian real is up a whopping 44% but the Canadian dollar hasn’t returned even ½ of that (coming in at 19%). Then you have the Aussie dollar whichdollar, which is in between Brazil’s and Canada’s returns.

Com-Dolls Trend Together But Their Returns Are Vastly Different

Why These Com-Dollars Have Such Different Returns

Why such a disparity? There are a couple of simple explanations for this.

1. All commodities aren’t trading the same all the time. For instance, when oil plummeted into the $30s (per barrel), gold was heading towards $900 an ounce. See the chart below.

Not All Commodities Soar or Fall Together…Just Look at Oil and Gold

Now if your buying the Australian dollar, you love higher gold prices because Australia is a huge miner and exporter of gold. So Australia’s economy is making tons of money on those exports. That helps the sentiment for the Aussie dollar greatly.

However, if you’re long the Canadian dollar, higher gold prices don’t help you at all. Instead you’re watching oil. Once oil starts to trade at or below Canada’s “end costs” then Canada’s economy is no longer profiting from its oil resources.

That really hurts the sentiment for the Canadian dollar, especially when their biggest oil customer (the U.S.) is stuck in a recession. This is why the Canadian dollar continued to disappoint.

So the specific commodities that affect these com-dolls can cause vastly different returns in the price. However, there’s always another dynamic at work, which will explain why Brazil tops them all.

2. Interest rates – Don’t forget about the “yield seekers” out there. Investors love to earn the most that they can on their money. So if commodities are recovering overall, then they will usually first start buying up the “commodity dollars” that have the highest interest rates and then start working their way down from there.

Well, let’s see. Brazil has an interest rate of 8.75% right now. Australia’s is the highest among the industrialized nations at 3% and Canada brings up the rear at 0.25%.

So which would you invest in if commodities were supporting them all to a degree? I’d pick Brazil’s 8.75% first and Australia’s 3% next, before I’d touch Canada’s paltry ¼ of a percent yield. And that’s exactly what investors are doing and the returns for each currency are showing that.

If you want a “bonus reason” to boot…then you could also add in the fact that China (world’s third largest economy) is buying up tons of commodities mainly from Brazil and Australia while the U.S. is Canada’s main customer.

Of course, you know China is performing much better than the U.S. right now. China is growing at 7.9% right now and the U.S. comes in at -2.5% (shrinking due to deflation). That much of a disparity in growth is bound to affect other nations…including the places where both China and the U.S. buy their commodities.

Bottom line: Don’t count on all commodity dollars to trade together. Instead, take a look at the subtle differences that separate these com-dolls so you can continue to profit in the weeks and months to come.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. My colleague Ashish just recommended his favorite commodity dollar in the upcoming issue of Currency Capitalist with a stellar play that pays 9% interest. Members, please look for your issue going online this weekend with all the details on this incredible opportunity. Not a member yet? Click here for details on how to become one.