Russia's ban on wheat exports as it struggles with its worst drought in 130 years could prove a windfall for investors betting on gains in the Canadian and Australian dollars, analysts say. While investors were already betting that commodity producers were likely to better weather the global economic crisis given strong demand from factories in China, the Russian export ban announced this week has made grain-producing nations more desirable investments.
-- Currencies of wheat producers likely to get a boost
-- Canada, Australia seen benefiting
Russia, the world's third largest wheat exporter according to the US Department of Agriculture, has banned grain exports from mid-August to the end of the year, pushing the price of wheat to a near two-year high. The move leaves the door open for higher exports from both Canada, the second largest exporter, and Australia, the fourth largest.
"Clearly, grain exporters should benefit from the rise in prices," said Andrew B. Busch, global currency and public policy strategist at BMO Capital Markets in Chicago. "But it has to be balanced by what is already happening in the economy."
Wheat is priced in US dollars so local currencies rise as producers convert their revenues into the domestic units, pushing up demand. Speculators betting on the local currencies also push up demand and prices. But even the US dollar, buffeted by other headwinds including a disappointing jobs report on Friday, may see more bids given that the United States is the world's largest wheat exporter.
"The US, the world's largest wheat exporter, stands to be the primary beneficiary in Eastern markets like India, the world's largest grain importer, which is heavily dependent on Russian import, as India is already in the market for US wheat," said Jonathan Granby and Alex Rodriguez of the DailyFX Research Team.
The direct benefit to the dollar comes from demand of all buyers who must convert their local units to greenbacks to purchase supplies. Even Argentina, the seventh-largest wheat exporter, could see a bid to the peso even within the tightly managed band allowed by the central bank.
There's still a myriad of other factors that could impact both currencies and the supply of wheat. Both the United States and Canada reported disappointing employment numbers on Friday, indicating the global economic recovery is slow and stuttering at best. "Canada will benefit (from higher wheat prices), but would benefit more if they were creating jobs," said BMO's Busch.
Heavy rains and flooding in central Canada will allow a smaller crop, which could push prices up again, though it is too soon to determine whether higher prices will offset lower physical sales completely. It is also unlikely to be all upward for the commodity bloc wheat producers.
Though speculators increased their net long positions, or bets the currencies will rise, on both the aussie and loonie in the week to July 30, according to Commodity Futures Trading Commission data, risk reversals are not so bullish. US dollar/Canadian dollar risk reversals are implying that more investors are betting the dollar will rise against its Canadian counterpart, though overall bullishness is less than it was two months ago.
One-month US dollar/Canadian dollar risk reversal was last at 0.90, well off the 2.93 level touched in early June, though still showing a bias to dollar calls and Canadian dollar puts. A put gives the option holder the right to sell at a set price while a call gives the holder the right to buy.
One-month Australian dollar/US dollar risk reversal was last at -3.475. Though less than the -6.4 touched in late May, it still shows a bias to dollar calls and Australian dollar puts, indicating investors are more bearish on the Australian dollar. "With the central bank increasing its rates, a recent increase in oil prices, and not a seriously significant rise over parity, the rise of the loonie makes more sense than for its counterparts," said William Reekstin, a director with Direct Access Partners, in New York,
Of course if wheat prices stay high, foreign exchange investors stand to gain the most with mostly short-term risk. At the other extreme are the farmers. Farmers do have the potential for higher total returns in US dollars this year, but as their local currencies rise on conversion demand, it will take more US dollars to buy them, lowering their revenue in local currency terms.