Where’s the Beta
Amongst FX, there exist currencies known as ‘commodity currencies’. This isn’t a fixed basket of currencies, however, particular candidates spring to mind when the group are mentioned. The foremost amongst the G10 are the Canadian, Australian and New Zealand Dollars. These currencies are so-called because they typically exhibit a positive correlation with the price of commodities. This is primarily because the underlying economies have an intrinsic exposure to commodity flows from an export perspective. However, it is also because of their high correlation with sentiment and performance within the global economy.
Following the escalation of conflict in the middle east there have been huge swings in commodity prices. This hasn’t been exclusively amongst oil futures, the knock-on impact upon hard and soft commodity prices has also been significant. What has been lacking is any noticeable bid into such currencies, specifically related to the conflict. AUD, for example, had been appreciating since the last RBA decision that surprised markets when they elected to raise rates in the face of rising inflationary pressures. However, amidst the outbreak of conflict and this latest spike in commodity prices, the currency underperformed on balance.
It is true, of course, that it is a demand-pull spike in commodity prices rather than a supply-shock driven rise in price that is most likely to spur on commodity currencies. However, theory at least, due to the supposed inelasticity of demand within commodities, tells us that both should apply. It has been the Canadian Dollar that has reflected best amongst the commodity currency basket, this latest spike in oil prices. Earlier this week, when oil prices had surged beyond $100pbl, the Canadian Dollar had been the only currency amongst the G10 to outperform the US Dollar. Concerns over the domestic economy in Canada may hold back the Loonie’s ability to benefit fully from elevated oil prices.
Discussion and Analysis by Charles Porter
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