Dutch Disese: Short the Aussie, Kiwi amid commodities crash - Barclays

SpacePete · Sep 22, 2015

Short the Aussie, Kiwi amid commodities crash, says Barclays

The hangover from the end of the commodity supercycle has wreaked havoc on a number of advanced economies.

Barclays's foreign exchange research team found that Australia, Canada, Norway, and New Zealand have been victims of a "Dutch Disease pandemic during the recent commodity boom".

What's Dutch Disease, you ask?

Dutch Disease refers to the process by which an increase in commodity prices exerts upward pressure on the currency of a nation that exports that natural resource, and causes a decline in the country's manufacturing sector, which loses competitiveness as the exchange rate rises.

The extent to which these developments are a negative is a point of contention among economists.

On the surface, during commodity price booms, the movement of labour away from manufacturing and toward the business of extracting natural resources is typically a move to a higher-productivity and higher-wage industry, and the movement of capital is to a place where it generates better returns.

It is the relative atrophy or hangover, so to speak-of the manufacturing sector as commodity prices wane, however, that prompts some economists to bemoan the reallocation of labour and capital resources that occurs when natural resource prices rise. Countries find it's much more difficult for labour and capital to move from resources to other parts of the economy than it was for them to move toward resources in the first place-and that a significant amount of exchange rate depreciation is needed before non-commodity segments of the economy are competitive once again. It's like trying to build up a muscle that has long been dormant.

Certainly, these four nations have experienced substantial declines in the value of their respective currencies v the US dollar over the past year:

"In an environment of falling export prices and slowing demand for commodities, the severity of an economy's Dutch Disease likely will determine the extent of currency depreciation needed to balance the economy," wrote the Barclays team. "In extreme cases, where new investment is required to expand the non-commodity export sector, both international and domestic investors likely will want to see a significantly lower exchange rate to offset the fixed costs of committing new capital."

The Barclays analysts attempt to find out which nations afflicted by Dutch Disease will shake it off and regain strength in non-commodity segments the fastest.

...

As such, Barclays recommends shorting the New Zealand kiwi and Aussie dollar relative to the US greenback, or, for the more risk-averse, going long the Canadian dollar v its Antipodean peers.

More: http://www.afr.com/markets/currenci...mmodities-crash-says-barclays-20150921-gjrwdz
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Dutch Disese: Short the Aussie, Kiwi amid commodities crash - Barclays

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Dutch Disese: Short the Aussie, Kiwi amid commodities crash - Barclays

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