Commodity Currencies Tumble Amid Weakening Raw Material Prices

Commodity currencies hit multi-week lows due to waning raw material prices. The Australian and New Zealand dollars, particularly, faced significant declines, while the yen surged to a two-month high ahead of a central bank meeting. Traders also anticipate rate cuts in Canada and potential hikes in Japan.

Commodity currencies plummeted to multi-week lows on Wednesday as declining raw material prices spurred heavy selling against the yen, which climbed to its highest in two months. The Australian dollar dropped 0.5% to $0.6586, close to chart support levels, and more than 1% to 101.79 yen, a nearly 7% two-week decline.

The New Zealand dollar slid 0.6% to a nearly three-month low of $0.5914, while the Canadian dollar reached a three-month trough of C$1.38 per dollar. This trend followed falling prices for industrial metals, such as iron ore and copper, which hit a three-and-a-half-month low amid a pessimistic outlook for Chinese demand and risk-averse stock markets due to disappointing U.S. earnings.

"We're seeing softer demand in China and Asia in general, with the kiwi and Aussie being pulled down," noted Jason Wong, senior markets strategist at BNZ in Wellington. Markets are pricing an 84% chance of a 25 basis point rate cut in Canada later on Wednesday.

The euro and sterling held steadier, dropping marginally to two-week lows of $1.0842 and $1.2884, respectively, with traders awaiting purchasing managers' index figures. Speculators, fearing a potential rate hike from the Bank of Japan and recent currency interventions, are closing profitable carry trades funded in yen. Dollar/yen dropped nearly 1% on Tuesday and an additional 0.6% on Wednesday to its lowest since mid-May at 154.36 per dollar, making the yen the best-performing G10 currency against the dollar in July.

Other pairs saw larger movements, with the euro falling 1.3% on the yen overnight and an additional 0.6% to a 10-week low of 167.48 in Asia. Mexico's high-yielding peso declined 2% on the yen on Tuesday and another 0.8% on Wednesday.

"Expectations that the Bank of Japan could raise rates further over upcoming meetings have risen, with markets factoring in two hikes by December," stated Corpay currency strategist Peter Dragicevich. "We believe the undervalued yen's revival has further to run."

Markets anticipate U.S. GDP and core PCE data later in the week, testing expectations for two U.S. rate cuts this year. Australia's second-quarter inflation data next week will be crucial for assessing another potential interest rate hike.