Commodity currency indicators to watch

In the currency world, “risk” or commodity currencies are aligned to rising economic activity driving demand for raw materials like iron ore and oil. The Australian dollar (iron ore) and the Canadian dollar (oil), tend to rise when prices for those commodities are high.

The Aussie is recently hit 80 US cents, a point not reached since 2017, driven by bumper exports of iron ore at high prices sent to China to meet their demand for steel.

Similarly, the Canadian dollar, or loonie, reached 3-year highs against the US dollar2 as the oil price (Brent crude) bounced back from its pandemic low of $20.37 to $64.81.

Commodity currency indicators to watch

If you are trading these currencies, keep an eye out for commodity price forecasts. Currently, Goldman Sachs predicts that we are entering a commodity “super-cycle”3 which will push up aligned currencies. It can affect adjacent countries, such as New Zealand, whose dollar is strongly correlated to the Aussie.Conversely, slowing growth will put downward pressure on commodity currencies, as demand for commodities, and the products they become, dries up. That will typically cause a rotation to safe-haven currencies like the USD.

The share market is the surest barometer of slowing growth. When investors understood in March 2020 the coronavirus would have major economic repercussions, the US S&P500 dropped 30% in a month. With investors spooked, they fled to US treasuries (safer bond investments) and the US dollar, pushing up the currency. In that same month, the commodity-correlated Aussie dollar fell 15% against the greenback.

Other factors can work against commodity currencies. China’s fractious relationship with Australia has led to heavy tariffs on wine, beef and grains4, and while iron ore has been spared so far, if the trade relationship soured further and impacted iron ore, the Aussie would be likely to suffer. 

Oil is particularly vulnerable to geopolitics, and currencies linked to oil exports — like the Canadian loonie — likewise.

Challenges affecting members of OPEC (Organisation of the Petroleum Exporting Countries) can cause the oil price to swing wildly as it did in 2018-19 when the price of crude rose 20%, crashed 40%, then rebounded 25% as fears of US sanctions on Venezuela and Iran were met by oversupply by Saudi Arabia and Russia. Armed conflict in or between member countries is also a factor that can quickly move markets.

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