The Currency-Commodities Nexus of the Big Eight

For many nations, commodities make up the bulk of their exports.  Unsurprisingly, the currencies of commodity exporting nations closely track indices of raw material prices weighted to reflect their importance to their respective economies. For some currencies, such as the Canadian dollar (CAD), Colombian peso (COP), Norwegian krone (NOK) and the Russian ruble (RUB), the price of crude oil is a dominant factor in determining the value of their exchange rates. For others, including the Australian dollar (AUD), Brazilian real (BRL), Chilean peso (CLP) and the South African rand (ZAR), mineral prices play a significant role.  For Brazil, agricultural goods are also important. 

The Energy Influenced-Currencies

The Covid-19 pandemic has impacted nearly all sectors of the global economy, but few have been harder hit than transportation and energy.  Globally, oil consumption has fallen by approximately one third.  Simultaneously, the OPEC+ coalition broke down in March, and Saudi Arabia decided to increase production during a time of falling demand.  This had an especially sharp impact on the currencies of nations that depend on oil for a large share of export revenue.  A subsequent 20-nation agreement to cut production by 10% appears to have stabilized the oil market in the short term, at least temporarily putting a floor under both oil prices and the currencies of oil exporters.  It’s not clear, however, that a 10% cut in crude oil production will be enough to bring output into line given the size of the drop in demand.

Since the beginning of 2020, COP and NOK have fallen to all-time lows versus the US dollar (Figures 1 and 2).  Meanwhile, CAD and RUB have retested lows from early 2016 – the last time that crude oil prices fell below $30 per barrel (Figures 3 and 4). 

For these currencies the key questions going forward will be how quickly oil demand will recover and will OPEC+ as well as American shale producers cut back production significantly enough to bring supply in line with demand.  Another question is how well diversified are these nations other exports?  In this regard Canada is relatively well positioned.  Crude and refined products amount to just over 15% of Canada’s net exports.  This compares to around 28% in Colombia and over 50% for Russia and Norway.  Canada has a robust and diversified industrial sector that exports cars, medical and industrial equipment in addition to other raw materials, such as aluminum, gold and diamonds, and many agricultural goods.  Canada’s manufacturing, mining and agricultural sectors will benefit from a weaker currency.  The same is true for Colombia, Russia and Norway but with less diversification: greater dependence on other raw materials and much smaller manufacturing bases.

Figure 1: COP has fallen to record lows versus USD as the value of commodity exports plunged

Figure 2: CAD-weighted-commodities fell much more than CAD, owing to Canada’s diversification.

Figure 3: Oil-related products account for 57% of Norway’s exports & production has been falling.

Figure 4: RUB has outperformed its commodity index owing to low debt and large FX reserves

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. 

Figure 5: Australia faces its first recession since 1991 but not mainly because of commodity prices.

Figure 6: Brazil’s fiscal situation as well as lower commodity prices weigh on BRL.

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).

Figure 7: CLP has moved closely in line with copper prices

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).

Figure 8: ZAR has underperformed its commodity index as the world economy slows.

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. 


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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