Correlation of Real, SA Rand, Norwegian Kroner, Russia Ruble to commodities prices
South Africa, Brazil, Norway and Russia are leading producers of various commodities. As a result, the price of commodities and the value of their currencies are inextricably linked. Last year was no exception to this trend. Declining commodities prices, particularly that of oil, had a significant impact on the value of their currencies.
On December 30th, for instance, the dollar rallied against the Russian ruble, the Brazilian real and Norway’s krone after declining oil prices weighed on oil-dependent economies. Specifically, the dollar rose to 73.45 rubles, hitting a one-year high. Compared to the Norwegian krone, the dollar hit a one week high of 8.798 crowns as Norway’s currency declined 0.8%. The dollar also hit a one-week high of 3.9849 against the Brazilian real, after the latter declined 2.4% against the dollar in afternoon trading.
The rally was driven by news that Saudi Arabia had no intentions to scale back on its output while US crude oil output continued to rise. Given the on-going supply glut in the market, Brent crude, the international benchmark for oil, reached an 11-year low.
Commodity prices will continue to impact currencies markets throughout 2016. Oil prices are expected to remain depressed as long as producing nations continue to pump at excessive levels in an effort to maintain market share. What does that mean for the currencies of oil producing countries and what other economic repercussions could declining commodities prices have?
Overall the news is negative for commodity producing countries. The lower commodities prices fall, the more likely it is that we will see a decline in their currency valuation, and as a result a decline in other commodities being exported from these countries.
Norway’s most important export product is oil, and its declining price has been attributed for the declining value of its currency. Faced with little alternatives, Norway’s Central Bank, Norges Bank, has predicted harder times ahead and low expectations for an economic turn around in the country. As a response, it is likely that Norges Bank will cut interest rates, which are already at record low levels. Expectations of an on-going depreciation of the country’s most important export, as well as the likelihood that Norway will increase its money supply will continue to expert pressure on the price of the krone, especially relative to the dollar.
Russia’s ruble has been similarly affected over the last year by declining energy prices. As a result of the economic pressures exerted by the low price of oil, Russia’s economy is expected to have shrunk by approximately 4% in 2015. Problematically for Russia, the correlation between the ruble and oil has increased over the last 6 months, suggesting that Russia has failed to diversify sufficiently as a means to protect itself from volatile energy prices. As the Russian ruble weakens in line with declining oil prices, it is able to export ruble-denominated products more easily. However, the weaker ruble will likely increase inflation, which will hamper the government’s ability to use its monetary policy to boost the economy, and in turn increase pressure on the ruble further.
As a major producer of ethanol, when energy prices decline, Brazil’s currency is affected, because the value of one of its major exports declines. The case of Brazil demonstrates how the prices of commodities become interlinked. In addition to being a major producer of ethanol, Brazil also produces other commodities like coffee, sugar and cotton. These so-called soft commodities are priced in Brazil’s currency when sold in international markets, which means that a declining real makes these commodities cheaper. This year, coffee prices declined significantly as not just Brazil, but also Colombia, another oil and coffee producing nation, experienced a significant devaluation in their currency. The International Coffee Organization’s composite price indicator declined an average of 22.34% between January and December of 2015
South Africa’s rand has also suffered in the face of declining oil prices. The currency hit a new low against the dollar on December 11th reaching 16.0485. Like in Brazil, declining oil prices have a perceptible impact on other commodities produced in South Africa, such as gold. An on-going depreciation of the Rand may lead to an excess supply of gold in the market, which in turn may exert additional pressure on the commodity and lower its value.
Investors should expect the currencies of commodity-based economies like Brazil, South Africa, Russia and Norway to continue to depreciate over the medium and long term. Until these economies are better able to diversify, their currencies will have a high correlation to energy prices.