Tailwind raw material prices can sometimes not be felt

From coffee to iron ore, raw material prices have risen sharply. Until now, however, the currencies of the countries that export these materials have been remarkably quiet. That could change.

The fact that we have less left at the end of the month has nothing to do with higher expenses. The prices of various items are rising sharply. The culprit is the scarcity of raw materials markets. A tonne of iron ore in London today costs 2,5 times as much as last year. Prices of other industrial metals (such as copper and aluminum) have also doubled. And a pound of Arabica coffee is trading for more than $2014 a pound for the first time since October 2. In June last year, the same pound cost just over $0,90.

Internal issues
The sharp rise in raw material prices is giving a strong tailwind to the countries that export these materials. The fact that up to now not much has been noticed about this is mainly the result of what is happening in those countries. A good example is Brazil, which is the second largest exporter of iron ore after Australia. Brazil is one of the main suppliers of agricultural crops. The Brazilian real has risen by more than 10% against the dollar. But despite that big jump, the currency is still 20% cheaper than when the corona misery started.

The real hardly benefits from the high commodity prices, because the country has been badly hit by the virus. Political uncertainty in the run-up to next year's elections also plays a role. This combination also means that the Brazilian congress is not in a hurry to implement the tax reforms. These are desperately needed to get the economy going, which barely grew before 2020. Finally, the central bank is working hard to raise interest rates. But the current level of 4,25% is still well below inflation of more than 8%. In Australia, too, rising interest rates are not enough to get the currency moving.

Are commodity currencies gaining wings?
Over the past five months, the Australian dollar has fallen by 4% against the US currency. This is partly due to the fact that the country has recently been struggling with the flaring up of the corona virus. Because Australia responds to this with strict measures, the economy is running a lot less well than in most other countries.

In addition, the relative weakness of the real and the Australian dollar is also part of the dollar's strength. It is only when there is more evidence that US interest rate hikes are taking longer or that the recent price increases for metals, crops and other materials continue, but commodity currencies will really take off.

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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