Make way for the commodity currencies

The prices of commodities such as oil and iron ore have risen sharply in recent months. However, this does not apply to the currencies of countries that export these commodities. Are the Russian ruble and the Brazilian real on the cusp of catching up?

Once the lockdown is over, we will have the chance to make up for months of sitting at home with going out, parties and holidays. In the stock markets, the party has already started. In the Netherlands, for example, the AEX has risen by more than 27% since the end of October. The Netherlands is certainly no exception, because in many countries the stock market indicators have shot up by 20% or more.

Investors have thus taken a substantial advance on the enormous boost that the economy will receive once the virus comes under control. However, that is not the case for the currency world. Prices there are mainly driven by trade flows and interest rates. This does not alter the fact that there are certainly opportunities for currencies if economic growth picks up soon

thriving economy
A booming economy needs more raw materials. It is therefore obvious that raw material prices will continue to rise in the course of the year. Some commodity currencies have even started to gain momentum. Australia, the world's largest supplier of iron ore, has seen its currency exchange rate rise more than 25% against the US dollar since late March.

The New Zealand dollar is being sucked into the rally. Although the country does not excavate metals or other raw materials, the export of dairy and (mutton) meat is an important source of income. The rise of the dollaridoo and the Kiwi Incidentally, this is only partly caused by a growing demand for raw materials. At least as important is that the economies of both countries are much less affected by the corona pandemic than the American one.

Interest rates down
Other raw material suppliers are not so lucky. Despite rising prices of iron ore, oil and more commodities, for example, the Russian ruble and Brazilian real have fallen more than 5% against the US dollar in recent months. This is mainly because other matters demand attention in the price development of these coins. For example, both countries have been relatively hard hit by the corona pandemic.

Brazil has introduced a huge package of measures to keep the economy on track, while the central bank has cut interest rates to an all-time low of 2%. Russia was hit last year by the sharp drop in oil prices. Under normal circumstances, the Russian central bank would have raised interest rates considerably to keep the ruble afloat. In 2015, for example, the interest rate went from 5,5% to 15% within a few months. But that was not an option because of the corona misery. The current interest rate of 4,25% is barely higher than inflation.

Catching up for rubles and real
Yet sometimes it takes very little to boost the currency of a commodity country. The South African Rand is a good example of this. This currency shot up by more than 20% in the past six months. This is not only due to the large exports of gold and other commodities, but above all to the prospect that the country will present a balanced budget next Wednesday, February 24.

If the economy picks up soon and raw material prices rise further, Russia and Brazil will also have more room to put their fiscal order in order. Once iron ore, copper and other industrial commodities pick up in line with the stock market due to the economic recovery, the ruble and real may well catch up.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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