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Bullish Commodities Run Benefitting Currencies

We are at the heart of a bullish run in the commodities market. Precious metals, base metals, energy products and agro-commodities have all but surged ahead in the wake of renewed optimism amidst the re-opening of numerous economies after lockdowns and prohibitory orders. Crude oil has registered the highest price of $76.97 per barrel on July 6, the highest since November 2014. The prices had climbed from a meager $6.54 per barrel at the height of the pandemic in March 2020 to skyrocket to the current prices. Copper, which was languishing at $1.9628 per pound in March 2020, has scaled to $4.8953 per pound in May 2021. In the agro-commodities bracket, corn has gained 47% over the last year. These preceding examples have triggered talk of a commodities supercycle- a sustained period of strong demand growth.

The commodities market is a global market and while most of the commodities are priced in US Dollars, the other currencies typically change with the value of primary commodity products. The reason attributed is due to the heavy dependency on export of raw materials for income. Hence, as the US Dollars depreciates in value, the price of commodities globally become cheaper and affordable. In this article, I will attempt to dissect the three tightest correlations of currencies to commodities.

 Canadian Dollar (CAD)

According to a report by EIA dated April 1, Canada is the fourth-largest producer of crude oil after the USA, Saudi Arabia and Russia. It has a share of 6% of the world total producing 5.29 million barrels per day. On a day-to-day basis, the correlation between crude oil and the CAD may fluctuate and swing sporadically, but over a long-term period, it has remained strong. Already voted as one of the best performing major currencies in 2021, the CAD has come a long way in the past year and is trading strongly vis-à-vis the US Dollar. Given the strong economic reports circulating from Canadian shores, the CAD is poised to become a market favorite for the remaining half of 2021 and into 2022 as well. Among several factors are the demand for abundant natural resources, attractive yields and proximity to the USA where vaccine rollouts and infrastructure spending are seen assisting Canada’s large export market to regain its stronghold for the loonie (a popular term for the Canadian Dollar in the FOREX Markets).

Australian Dollar (AUD)

The AUD has benefited from a combination of depreciating US Dollars coupled with climbing commodity prices. Despite low rates of Covid 19 in comparison to the rest of the world, the tourism sector has suffered in Australia. However, the commodity markets have only observed modest impacts from the pandemic. The AUD has performed better against the US Dollars than the other currencies since commodities prices have been on the verge of anticipation of a global economic recovery. The assets of Australian resources are closely linked to the Chinese economy which has recovered, and the escalating global demand should help alleviate any rift with China to keep the Aussie (a popular term for AUD/USD in the FOREX Markets) strong. Australia is a major producer of iron ore, aluminum and copper which are in demand as manufacturing picked up in major economies around the world.

New Zealand Dollar (NZD)

Popularly known as Kiwi in the FOREX Markets, the NZD is explained as a commodity currency mainly due to the nation’s reliance on agricultural commodities. The NZD is also closely correlated with the Chinese economy. The surge in commodities prices along with prospects of a relatively rapid vaccine rollout in the country have helped the economy to relatively escape the pandemic scare unlike the rest of the world. Likewise, the NZD has significantly rallied against the US Dollar and other rival currencies because the Reserve Bank of New Zealand (central bank) was among the first in the world to tighten its fiscal policy in the wake of the pandemic last year.

Conclusion

As the US Dollar remains pressurised and the world regains some sort of normalcy from the pandemic, the vision of prolonged US inflation may benefit rival currencies. However, the recent rise in the value of their currencies is a reminder that commodity markets produce ripple effects that affect the global foreign exchange markets. I do understand that reading the FOREX markets requires a different trading skillset and acumen, but since the global financial markets are closely linked, analysing the FOREX Markets and studying the developing patterns and trends will offer new insight as a way of trading in the commodities market.

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]

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