Commodity Currencies

Why currencies like the Australian and Canadian dollars and the Norwegian krone rise and fall with commodity prices, and what this means for their economies.

Some currencies move closely with the prices of the commodities their countries export. They are called commodity currencies.

Examples

Australian dollar: linked to iron ore and coal.
Canadian dollar: linked to oil.
Norwegian krone: linked to oil and gas.
New Zealand dollar: linked to dairy.
Chilean peso: linked to copper.

Why they move together

When commodity prices rise:

Export earnings increase.
Foreign buyers need more of the country’s currency.
Investors expect stronger growth.

So the currency tends to strengthen. When commodity prices fall, it tends to weaken.

A shock absorber

A floating commodity currency can act as a shock absorber:

When commodity prices crash, the currency falls, making other exports and tourism more competitive and cushioning the economy.
When commodity prices rise, a stronger currency limits inflation.

This is one reason Australia and Canada weathered commodity downturns relatively well.

The downside

A strong currency during booms can hurt manufacturing (Dutch disease).
Volatility makes planning harder for businesses.

Investors

Traders use commodity currencies to bet on commodity prices and global growth.

India’s rupee

India is a commodity importer, especially of oil. When oil prices rise, the rupee often weakens, the opposite pattern.

The oil slump

When oil prices fall sharply, the Canadian dollar drops. Canadian oil companies suffer, but manufacturers exporting to the US and tourist businesses benefit from a cheaper currency, cushioning the economy.

Thinking a falling currency is always bad

For commodity exporters, a falling currency can cushion the economy when commodity prices drop.

Key takeaways

Commodity currencies move with the prices of their countries' exports.
Examples include the Australian and Canadian dollars and Norwegian krone.
Floating currencies act as shock absorbers.
India, an oil importer, often sees the rupee weaken when oil prices rise.