Commodity prices increased in the agriculture, energy and metals sectors. Oil is up 95% from its March 2020 lows, copper has rebounded 91% and corn has gained 47% in the past 12 months, to name a few. These staggering gains have led to talk about a raw materials supercycle. A supercycle is a sustained period of unusually strong growth in demand. It can go on for decades and outlast the typical business cycle.
Commodities are global in nature and although they are usually valued in US dollars, commodity currencies generally move with commodity prices due to these countries’ heavy reliance on the export of materials. raw for their income. Therefore, as the dollar weakens, the price of commodities becomes more affordable globally. The three major currencies most correlated to commodities are the Australian dollar, the Canadian dollar and the New Zealand dollar.
Canada is the fifth largest producer of crude oil and has the third largest reserves in the world. On a daily basis, the correlation between oil and the Canadian dollar may fluctuate, but in the long run it has been strong. Already one of the top performing major currencies in 2021, the Canadian dollar looks set to become a market favorite for the remainder of 2021 and beyond. Demand for Canada’s abundant natural resources, attractive yields, and proximity to the United States, where vaccine deployments and infrastructure spending are seen as helping Canada’s largest export market regain a foothold, are some of the reasons for the loonie’s gains.
A combination of high commodity prices and a weakened US dollar boosted the Australian and New Zealand dollars. Despite extremely low COVID-19 death rates compared to the rest of the world, tourism has been hit hard in both countries. However, their commodity sectors suffered only modest impacts from COVID-19.
The Australian dollar has performed better against the dollar than other currencies as commodity prices have been falling in anticipation of a global economic recovery. Australia’s resource assets are closely tied to the stronger Chinese economy, and global demand should help ease any break with China to maintain the strength of the Australian dollar. Australia is a major producer of iron ore, copper and aluminum, all of which are in demand as manufacturing resumes after the recession. In fact, minerals and fuels made up 47% of Australia’s total exports according to government trade data.
Iron ore is Australia’s main source of exports, valued at $ 150 billion through the first quarter of 2021. Iron ore’s jump to over $ 200 per metric tonne was a huge tax windfall for the Australian government, which had budgeted prices of just $ 55 / tonne. The demand for iron ore is likely to exceed supply in the near future.
LATEST IN FX
New Zealand dollar
The New Zealand dollar, known as the kiwi, is defined as a commodity currency primarily due to the country’s dependence on agricultural products. The kiwi is also closely linked to the Chinese economy. Rising commodity prices and the prospect of a relatively rapid vaccine rollout in New Zealand have helped the economy. In addition, the kiwi has rallied significantly against the US dollar and other currencies as the Reserve Bank of New Zealand may be one of the first in the world to tighten fiscal policy.
The prospect of prolonged US inflation could benefit all of these currencies as the US dollar remains under pressure and the world comes to its senses after the COVID-19 pandemic. Their recent rise, however, is a reminder that commodity markets produce spillover effects that affect currencies. As we watch to see if a supercycle materializes, demand for oil (Canada), iron ore (Australia), and dairy and beef (New Zealand) will be among the barometers determining the direction of these currencies.
Image from Pixabay