It seems that the downturn in the price of most raw materials due to weaker Chinese economic output, and the ensuing downturn of raw material related currencies, has come to a halt. In some cases, the tables have turned, and the US Dollar has been losing ground to many of its peers, after reaching near historic heights. This could be due to a number of reasons. However the slowing pace of planned Fed rate hikes is likely to be the most influential factor. It seems that the markets overestimated the effect of planned rate hikes, and priced them in a little bit too early.
The Greenback has lost ground against the Loonie, the Australian Dollar and the Ruble during the last 3 months. Against the Canadian Dollar, the US Dollar has lost 10.7% of its value during the last 3 months. In the same period of time it has lost about 9.9% of its value against the Australian Dollar, and about 16.5% against the Russian Ruble. The common denominator here being the significant role that raw material exports play in the account balances of these 3 countries.
Oil, as well as industrial metals constitute a significant share of Canadian, Australian and Russian exports. Once the prices of those raw materials fell due to lower Chinese demand and lower global aggregate demand, their currencies suffered near record depreciation. Since the price of oil and many other raw materials has seen a tepid recovery at best, the most influential factor on these currencies, and those of other nations that rely on similar exports, seems to be the slower than expected Fed rate hikes.
This situation is particularly evident in the USD:CAD pair. With Crude exports from the Oil sands and other parts of Canada slumping, and the slower than expected recovery in Canadian manufacturing, the Loonie should not be recovering at this pace. Continued recovery despite recent oil price decline, highlights the fundamental contradiction. At this pace, Canada and other such nations risk getting into a situation in which their currencies are not weak enough to raise the competitiveness of their manufactured and other non-raw material exports, while still having reduced proceeds from an ailing raw material sector.
This situation will probably put a downward pressure on their currencies again, but any change in that realm may still be underpinned by Fed policy. If the rates on the greenback are lifted more than once again during this year, these currencies will probably lose the ground they have gained so far. A renewed slump in oil prices and continued deceleration in China, could reinforce a potential plunge triggered by rising rates on the Greenback. In the meantime, the US Dollar is poised to keep on losing ground to other major currencies.