I’ve got a pair of graphics that I think tell and interesting story. They look at a pair of currencies which fall into the commodity category in that they tend to be highly correlated to changes in the price of things like oil, gold, etc. The first graphic shows USD/MXN with oil (front month futures), the correlation between those two markets, the S&P 500, and that index’s correlation to USD/MXN.
Mexico is an oil producer, so the peso often sees its value impacted by changes in the price of that commodity. As you will notice in the chart above, though, the correlation between USD/MXN and oil prices, as indicated by the red line in the middle of the chart, has been up and down on both sides of the zero line (Note: When the line is positive, the MXN is actually negatively correlated to oil). By contrast, the correlation between USD/MXN and the S&P 500 (bottom line) has been strongly positive for most of the last 12 months (on a trailing 20-day basis).
Notice below that we can see a similar type of pattern in AUD/USD relative to those two markets.
Now, it should be noted that the S&P 500 and oil tend to be positively correlated, but it’s a choppy thing. The relationship often breaks apart and sometimes even goes negative. This is a function of the factors which influence oil prices (such as geopolitics and supply/demand considerations) which may not be as significant a factor in stock prices. Equities are perhaps better indicative of general economic conditions, especially on a forward looking basis.
So what does this all mean? It’s telling us that the so-called commodity currencies are more sensitive right now to general economic conditions than to commodity prices. In the case of the peso, we often see it responding to conditions in the US as better economic prospects north of the boarder means more exports. In the case of the Aussie, there is more of a Chinese linkage, but also a carry trade factor. With the higher Australian interest rates, that’s a favorite for longs against the likes of the yen when the markets are feeling positive.
With these things in mind, it is worth watching how these currencies perform as they can sometimes tip off underlying strength or weakness in the global markets. That has actually been the case of late in the way commodity currencies did not dip as much as they may have been expected – or in the case of the MXN, rallied very strongly. Something to keep an eye on.
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