The Currency-Commodities Nexus of the Big Eight

While Russia depends heavily on commodity exports, its currency has done better than one might have expected, given the size of the drop in commodity prices.  Two factors explain Russia’s outperformance.  First, Russia has enormous foreign currency reserves.  Since the crash in oil prices in 2014-16, Russia’s FX reserves have risen from around $350 billion to over $550 billion.  This equates to nearly one third of annual GDP.  Secondly, Russia is among the world’s least indebted countries.  Government debt was only 15% of GDP at the end of Q3 2019.  Household debt was 19% of GDP and corporate debt was  around 46%.  Some of the corporate debt is tied to oil companies.  Even so, Russia’s 80% total debt-to-GDP ratio pales in comparison to most western nations, whose debts often come close to 250%, and is even among the lowest by emerging market standards.  Colombia’s debt level is 108% of GDP, Brazil’s is double Russia at around 160%, while Chile’s amounts to 186% ,according to the Bank for International Settlements. Russia’s low debt and large currency reserves give it substantial latitude to navigate the crisis.

The Mineral-Focused Currencies

Metals prices and coal prices haven’t fallen as dramatically as the price of oil.  Nevertheless, the shutdown of large swaths of the global economy is impacting demand for manufactured products and power generation to the detriment of materials prices. 

Iron ore and coal are Australia’s primary exports, each accounting for roughly 20% of overall exports and 3.5% of GDP.  Moreover, 40% of Australia’s overall exports head to China, whose two-month shutdown severely impacted demand.  As such, China’s reopening comes as welcome news for Australia.  Even so, the fact that most of China’s export markets have shuttered large segments of their economies will continue to negatively impact demand for Australia’s exports to China and other nations, leaving the country to face its first economic downturn since the early 1990s.

A flexible exchange rate sheltered Australia’s economy from the negative impacts of weak raw materials prices in the 1990s, the sharp fall in commodity prices in 2008 and 2012-16.  AUD has fallen in line with the drop in the value of key commodity exports (Figure 5).  This will likely protect Australia from some of the deleterious effects of the fall in global demand for its exports.  Even so, Australia has had to implement social distancing practices domestically and a weak currency won’t attract tourists with global air travel severely curtailed by the pandemic. 

In contrast to Australia, Brazil’s economic situation was difficult even before the pandemic hit, having suffered a deep recession in 2015-16.  In contrast with Russia, not only does Brazil have a much greater overall level of debt, its annual deficits were around 7.5% of GDP in 2019, compared to a 1.8% surplus in Russia.  Moreover, hopes for tax reform to follow last year’s pension reform have stalled in Brasilia.

BRL has weakened significantly under pressure from lower commodity prices so far in 2020 (Figure 6).  What may have prevented BRL from falling even further has been the nation’s reliance on agricultural exports, which have been less impacted than oil or metals prices.  Iron ore is Brazil’s largest export.  Brazil is a major oil producer, but its export and import of oil largely cancel one another out.  The remainder of Brazil’s exports are overwhelmingly agricultural, including corn, soybeans, coffee and sugar.  Prices for corn and sugar, both of which can be used to make ethanol, have fallen by about 20% and 30%, respectively.  Soybean oil prices have also fallen sharply but soybeans and soymeal prices have been stable while coffee prices have risen.  Finally, lumber prices fell by as much as 50% before rebounding. 

While Norway and Russia depend on oil, Chile depends on copper, which alone amounts to nearly half of all the country’s exports.  The rest of the Chile’s exports include goods like fish, fruits, wines and wood products as well as other metals including aluminum, iron ore, gold and silver.  One commodity that Chile doesn’t produce much of is oil and lower oil prices are a good thing for Chile, reducing its import bill.  Even so, CLP has fallen largely in line with the dollar value of its copper-dominated commodity exports (Figure 7).

South Africa’s commodity index has been largely saved by gold, one of the few commodities that has gone up in price during the pandemic.  Gold has benefitted from a global race to zero interest rates and a return to quantitative easing programs.  Even so, the rand has suffered as other commodity prices have fallen and as investors shifted into risk-off mode (Figure 8).

Bottom Line

Flexible exchange rates can often insulate commodity producers from fluctuations in the prices of their exports on global markets. So far during the Covid-19 pandemic, the currencies of eight major commodity exporters have, by and large, continued to track movements in the value of their respective commodity exports.  Domestic factors may have weighed on certain currencies more to the downside, notably in Brazil, while others, like Russia, which is in robust fiscal health, have somewhat outperformed.