With commodity prices falling in recent weeks, the market has been selling the traditional commodity currencies (AUD, NZD, and CAD). However, the relationship is more complex than it appears.
Analysing the correlation between the CRB index and currency movements over the past five years yields some surprising results. Along with the traditional commodity currencies (AUD, CAD, NZD, NOK), both PLN and SEK show a strong positive correlation. As both have large trade deficits in commodities, it suggests that a third factor is at work.
We find that the CRB displays a very high positive correlation with the risk on – risk off factor, which suggests that, at least for now, ‘commodity currencies’ are simply yet another manifestation of ‘risk on’ currencies.
Rising commodity prices (because of a supply squeeze) in a weak growth environment could actually see ‘commodity currencies’ fall as risk off would dominate.
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Global Research