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August 4, 2014 11:52 am

El Niño affects FX as well as commodities

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Currency forecasting is fraught with enough difficulties already,” says Adam Cole at RBC, “without making it subordinate to weather forecasting.”

But the bank’s head of G10 FX strategy is brave enough to give it a go in relation to El Niño, the climate phenomenon usually assessed for its impact on the commodity sector.

As Mr Cole admits, there is much analyst debate on the chances of a significant El Niño event in 2014-15, “but all agree the risk is elevated compared to recent years”.

The difficulty in calculating the El Niño forex effect is in measuring the extent by which, if agricultural commodity supply is hit, exporting nations may benefit from higher prices but lose out from lower production.

Often analysts focus on how this affects a country’s terms of trade. Another approach is to use price and volume shifts to work out the impact on economic growth.

Research shows Australia, New Zealand and Japan all suffer significant output losses from El Niño events but, for some nations, it is growth enhancing – notably for the US, Canada and Europe, says Mr Cole.

“Taking the historic returns with this evidence, it should be clear that a significant El Niño event this winter would likely be CAD-positive and AUD and NZD negative – the opposite of our core views.”

jamie.chisholm@ft.com

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