Commodity-linked currencies risk becoming victims of their own success as this year's rally leaves them more dependent on continuous upside surprises on the economy to drive them beyond key technical barriers.
A move by China to allow the yuan to appreciate may also knock these high-yielding currencies if it triggers risk aversion and clouds a rosy outlook for the global economy.
The Canadian, Australian and New Zealand dollars have rallied in recent weeks, backed by strong economic fundamentals, buoyant Chinese demand for commodity exports from all three countries and the prospect of rising domestic interest rates.
The rally has brought the Australian and Canadian dollars, in particular, close to key technical levels beyond which they may struggle, increasing the risks of a correction.
"Ultimately the forces underpinning the CAD, the Aussie and the kiwi are not going to change that much and these trends are going to continue into more and more overvalued territory," said Neil Mellor, currency strategist at Bank of New York Mellon.
"Some very nervous investors could look to take profit and it will get quite choppy," he said, adding that the recent rise in the number of speculators favoring these currencies also left scope for a pullback.
There are signs all three are struggling to make headway.
The Canadian dollar has failed to stay above the psychologically key parity point against the U.S. dollar after last week's breach.
Recent weaker-than-expected Canadian jobs data sparked a sudden 80 pip drop in the CAD, highlighting sensitivity at these levels.
The Aussie hit a 5-month high of $0.9389 but the 2009 high of $0.9407 is proving a tough obstacle, especially after disappointing Australian housing finance data this week.
Commodity currencies have strong links with investor risk appetite. For example, the 90-day rolling correlation between the Canadian dollar and the Volatility Index, a gauge of investor anxiety, stands at a negative 0.86.
A move by China to revalue the yuan — which many in the market expect soon — could trigger a knee-jerk negative reaction for commodity currencies as investors fret this could dent risk appetite and weigh on Chinese demand for commodities.
"If China allows a significant yuan appreciation, the Australian and New Zealand dollars would likely be the biggest losers in the G-10," Barclays Capital said in a note to clients.
They are most sensitive to risk appetite, while the Aussie and CAD are most linked to commodities, its analysis showed.
But Standard Bank currency strategist Steve Barrow said a lasting negative impact would require a significant revaluation — which markets do not expect.
He has one-year forecasts for the AUD at $0.98 and the NZD at $0.78 and a 6-month CAD view of C$0.94.
A series of interest rate hikes in Australia has allowed the currency to appreciate 3.5 percent against the U.S. dollar this year, but if other central banks lifted rates, this would shave the currency's yield advantage and erode its appeal.
"We think the interest rate story has pretty much run its course for the Australian dollar," said Adam Cole, head of FX strategy at RBC.
"Rather than playing outright commodity FX as a bloc, the story going forward will be much more based on relative value within the commodity currencies — buying those that are in a relatively early stage of their domestic cycle relative to those that are at a mature stage."
Canada and New Zealand are expected to start raising rates in the third quarter, just as investors expect the Federal Reserve to move.
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