Commodity Currencies,
Commodity Prices and the U.S. Dollar
By Despina Margiori, VP Foreign Exchange Sales, MB Financial Bank
The co-movement between commodity currency values
and commodity prices has been observed since at least
1995, when data sets became available. Since then, studies
have shown and market observers have seen a correlation
between certain currencies and commodity prices. Knowing
which currency is correlated with what commodity can help
businesses understand and “predict” sudden changes in
the market and exchange rate fluctuations.
What is a Commodity Currency?
The term “commodity currency” is used to refer to the
currencies whose value depends largely on a country’s
export of raw materials such as oil, precious metals and
agricultural products.
Since economic growth and exports are directly related to
a country’s Gross Domestic Product (GDP), it is natural for
some currencies to be heavily correlated with commodity
prices. Currencies of “commodity countries” tend to
correlate with the general value of commodity prices to a
higher degree relative to the currencies of countries that are
less dependent upon commodity exports. We can identify
countries including Australia, Brazil, Canada, New Zealand,
Norway and South Africa as nations that export a good deal
of commodities.
Normally, as commodity prices rise, the cost of goods
sold moves higher, increasing prices. This is viewed as
inflationary. A natural response to inflation and increasing
commodity prices is a rise in interest rates, strengthening
that currency. In short, as the cost of borrowing rises due
to inflation, a reasonable assumption is stocks will decline
as a result of borrowing costs. The impact may lag between
when and how much the markets will react to the sudden
fluctuations from currencies, to commodities, to bond prices
and to the stock market. Not everything happens instantly,
and during those transitions other factors come into play,
including intervention to divert the natural market reaction.
Major Exports of “Commodity Countries”
COUNTRY
MAJOR EXPORTS
Australia
Coal, iron ore, gold, meat, wool, aluminum, wheat, machinery and transport equipment
Brazil
Transport equipment, iron ore, soybeans, footwear, coffee, autos
Canada
Motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment; chemicals,
plastics, fertilizers; wood pulp, timber, crude petroleum, natural gas, electricity, aluminum
New Zealand
Dairy products, meat, wood and wood products, fish, machinery
Norway
Petroleum, petroleum products, machinery, equipment, metals, chemicals, ships, fish
South Africa
Gold, diamonds, platinum, other metals and minerals, machinery and equipment
Source: CIA Factbook
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Commodity Currencies, Commodity Prices and the U.S. Dollar
The top 3 currencies that have the tightest correlation are
the Canadian Dollar (crude oil), the Australian Dollar (gold)
and the New Zealand Dollar (agricultural products).
If the price of a company’s product increases, it will
probably earn more profit. A big increase in the price of
crude oil, for example, will increase the profit/earnings of oil
companies dramatically.
If the price of a commodity that a company uses a lot of
drops, its costs can fall and its earnings/profit may rise.
A company that uses a lot of oil to produce its goods will
probably earn less profit if the price of crude rises and its
costs increase. Earnings/profits in plastic producers, for
example, tend to suffer if oil prices rise. Companies can
choose to pass on their higher costs to their customers in
the form of higher prices. This may then reduce demand for
their products and hurt their earnings further.
Source: FXCM
Besides the currencies mentioned above, other commodity
country currencies make the list. These currencies are the
Brazilian Real (BRL), Norwegian Krone (NOK), and South
African Rand (ZAR) which gravitate towards the top of
the correlations.
In general when commodity prices go up, the net exports
of commodity-exporting countries increase, the terms
of trade become more favorable for these countries and
their currencies rise in value. This principle drives the
co-movement between the commodity currencies and
commodity prices.
Correlations between currencies and commodities are not
an exact science. Often correlations weaken and may even
reverse for extended periods. Relationships may change
over time as countries alter exports or imports, and this will
affect correlations. The US Dollar and commodity prices
historically trend in opposite directions, but that in and of
itself should not be a reason to buy and sell.
Impact on Businesses
Foreign exchange rates, just by the fluctuations alone,
can affect how much a company pays for the goods it
imports (or consumes) and earns for the goods it exports
(or produces). Similarly, the volatility of commodity prices
will affect a company’s profit depending how much this
particular company uses or produces the natural resources
or is exposed to them.
Conversely, if the company that produces that commodity
sees the commodity price fall, then the company could see
its earnings/profit fall. And of course, it could see its earnings/
profit rise if the price of the commodity it produces rises.
Key Commodities and Industries They Could Affect
ƒƒ Crude Oil and related oil products like diesel and petrol are
a big cost for numerous industries, as petrochemicals are
used to produce a range of products including tires, asphalt
and most kinds of plastics.
ƒƒ Gold is used to produce jewelry but also has industrial
uses, for example in the production of medical products
and glass. It is also used as a virtual currency — a safe
haven investment vehicle.
ƒƒ Lumber is a big cost for construction companies.
ƒƒ Cotton is used by apparel makers, as well as producers of
furniture, household linen and even items like coffee filters.
ƒƒ Wheat is used to produce everyday items like breakfast
cereal and bread; therefore, food producers, supermarkets
and grocers are heavily exposed to its price.
ƒƒ Corn is used far more widely than many consumers
imagine — for example in the production of tires, building
materials and biofuels like ethanol. Manufacturers and
retailers of such products are therefore exposed to its price.
ƒƒ Coffee producers and coffee-shop chains are obviously
exposed to coffee prices, but so too are most kinds of
restaurants as well as supermarkets and grocers that sell it.
Sources: “Commodities as a Currency Driver”, September 20, 2012; CME Group
“Changes in the Relationship between Currencies and Commodities”, March
2012; Bank of Japan Review, Bloomberg, FXCM, Reuters with CNBC
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