Under normal circumstances there is a strong correlation between the price of commodities and the strength of a commodity-linked currency. As we have previously reported, when crude oil prices weakened in late 2018 the Australian and Canadian dollars both experienced double digit falls.
But a JPMorgan research note published on May 7 pointed to a significant decoupling of commodity FX (based on a basket of currencies that includes AUD, NZD, CAD, NOK, BRL, RUB, ZAR, CLP, COP, PEN, and MXN) from commodity prices this year. The authors observed that several commodity currencies are now screening cheap relative to commodities and that their typical correlation is unlikely to return anytime soon.
However, Adam Button, chief currency analyst at ForexLive, reckons there is no better place to be in the current phase of the economic cycle. “There is an abundance of disbelief in both commodities and commodity currencies, but that kind of scepticism is usually a sign that a bull market has a long way to run,” he says.
“It is exactly what you would expect coming out of a pandemic and with so much uncertainty in the world, although some of it also reflects bottlenecks and a reluctance to embrace the post-pandemic boom.
