How to take advantage of correlations between currencies and raw materials?

Many times, as we are currently living, there are markets that tend to correlate their movements in certain situations. Currently, raw materials is the market that most benefits from geopolitical tensions. In turn, the currencies of the largest raw material producing countries take their share of the cut. And that is what we are going to learn today in this investment training; correlations between currencies and raw materials…

What are correlations between assets?

Correlations are movements that two assets of the same class or different types of classes can make. We can observe this type of correlation when two assets have the same level of exposure to the same factors. A clear example of correlation of movements can be seen in the article we wrote about Bitcoin and the Nasdaq 100. In it we explained the factors that determined the correlation of movements between the technological index and the most valuable cryptocurrency. 

What correlations can we find between currencies and raw materials?

This question is what we are going to address in this investment training. Raw materials are correlated with certain currencies since there are countries that have their economies widely exposed to the production and export of raw materials. Therefore, when events occur that affect the raw materials market, it ends up spreading to the currencies of said countries. These correlations can occur in times of economic growth as well as in times of recession like the current ones. There are mainly three currency pairs that have an 80% correlation with different commodities, better known as the “Comdolls” (Commodities Dolls in English). This group lists the Australian Dollar (AUD), the Canadian dollar (CAD)and the New Zealand Dollar (NZD). 

Let's continue with the investment training on correlations analyzing the main ones between currencies and raw materials:

Australian dollar (AUD)​

The first correlation that we will analyze in this investment training will be that of the Australian dollar. The AUD is correlated with movements in gold and copper. Thanks to the correlation with these two metals, it has given it an economic advantage over other countries. In large part it is because Australia is one of the main gold producing countries. Specifically, the third largest gold producer in the world with more than 315 tons of gold, equivalent to more than 8% of world production. To be more precise, the AUD is the currency most correlated with gold movements over the last 15 years. 

We can also see a strong correlation between the Australian dollar and the New Zealand dollar. At first glance, both their fiscal policies and economies have similar characteristics, even though Australia is larger compared to New Zealand. But there is a fact that strongly correlates these two currencies. The second exporting country of raw materials from New Zealand is Australia. So the purchasing power of the Australian economy can directly benefit or affect the New Zealand economy. Therefore, if the Australian dollar strengthens or contracts, the New Zealand dollar will follow in its footsteps with greater impact on its economy. 

Chilean Peso (CLP)

Yes, it is a currency that does not fall within the Comdolls mentioned above in this investment training. However, the Chilean peso (CLP) has a characteristic that positions it as the country most exposed to price fluctuations in copper production globally. As we explained in another article, Copper is considered a thermometer of the world economy, since it is mainly required for industrial production. It turns out that the Chilean country is home to almost 30% of global copper production. To put this data in context, Peru is the second country that produces the most copper in the world, with 11% of the market share… 

New Zealand dollar (NZD)

Let's look at the third correlation of this investment training on correlations. The New Zealand economy bases a large part of its economy on a model of exporting agricultural and livestock raw materials. The New Zealand economy bases its exports on soft raw materials such as wool, milk and livestock, as well as natural gas and other metals. To put this data in context, milk production in New Zealand corresponds to 14% of national exports, 2% of world production. In turn, as we have commented in the previous paragraph, the NZD is directly correlated with the purchasing power of the Australian economy. 

Canadian Dollar (CAD)

The last correlation we will analyze in this investment training on correlations will be those of the Canadian dollar (CAD). The CAD is quite exposed to fluctuations in the energy sector. Despite not being one of the largest oil producers in the world, it is fortunate to be the main country that imports this raw material to the economy that consumes it the most; the United States. Canada is one of the main oil producers globally, behind Saudi Arabia and Venezuela. 

We can also observe a correlation of movements between the currency pair of Canada and Japan (CAD / JPY). This is because Japan imports more than 90% of the oil it consumes from the Canadian country. Not to mention that the Canadian country also exports a large part of the technological needs of the Japanese country. In turn, the US economy benefits since black gold trade deals are carried out in American dollars (USD). 

Conclusions from this investment training on correlations

After finishing this investment training on correlations between currencies and commodities, we can draw several conclusions. We have listed the main correlations that we can observe between the currency market and the commodities market. Therefore, we can mainly see how commodity market events affect the currencies that have the largest market share in terms of production. In this way, if a commodity has an event scheduled that can move the commodity market, the most sensible thing would be to look at which currencies are most exposed to said events. 

To conclude this investment training on correlations, we want to remember that these correlations do not assure us of accurate movements, but they can serve as a reference for future movements.