CURRENCIES & COMMODITIES
Figure 1: Historically Strong Negative Relationship
Why is the USD-Commodities
Between Commodities & USD (1995 - present)
2
Relationship Asymmetric?
(Monthly commodity price elasticity with respect to DXY change) Two possible reasons for this ‘commodity
Feeder Cattle
stickiness’, or the asymmetry in the commodity-
Live Cattle
currency relationship, are related to:
Sugar An elasticity of -1 implies a
Lean Hog
1% rise in the USD has been
Soybean
1. an asymmetric response of exports and
Corn
associated with a 1% fall in
exporting nations to currency movements.
Cotton
the commodity price.
Heating
2. the asymmetric effect of US monetary policy on
Coffee
Zinc the US economy vs. the global economy.
Aluminum
Wheat (1) Exports and exporter nations can react quite
Cocoa
Lead
differently to a falling local currency (rising USD),
Gasoline
WTI
which makes their exports more competitive.
Silver
Mercantilist policies in many emerging economies
Copper
Gold have tended to support these moves, while research
Heating
Nickel
suggests that exporters become less competitive
Natural Gas
long-term as a result of enjoying the
-1-0.8 -0.6 -0.4 -0.2 0 0.2 0.4
competitiveness gained simply through a currency
Source: Bloomberg, Morgan Stanley Commodity Research estimates
move. On the other hand, a rising local currency
(falling USD) creates a tougher export environment,
Figure 2: USD Has Seen Two Main Trends Since 1995
which can encourage a policy response, while
exporters are forced to become competitive
(DXY trade-weighted USD)
through improved efficiency – becoming more
130
efficient with limited commodity resources.
120
(2) Because many currencies are still set to the
USD, either through a direct or soft peg or through
110
a less flexible trading band, US monetary policy
affects economies beyond the US. However,
100 because of idiosyncrasies of the US economy,
importantly the amount that US consumers are
90
leveraged, the effect of policy likely depends on
direction. Specifically, while loose monetary policy
80
in the US is inflationary inside and outside the US,
sufficient tightening to reverse the inflationary
70
Appreciating Depreciating
affect in the US is likely not enough to reverse the
60
effect beyond the US owing to the increased
1995 1997 1999 2001 2003 2005 2007
sensitivity to higher interest rates by credit
burdened US consumers. Thus, even tight policies
Source: Bloomberg, Morgan Stanley Commodity Research estimates
can be mildly inflationary – positive for
commodity prices.
Figure 3: Relationship Has Been Stronger Through the
Recent Depreciation
tive commodity price. With the excep-
tion of livestock and sugar, the elastic-
(Monthly commodity price elasticity with respect to DXY change)
ities have been fairly strong.
2.0 1995-2001 2001-present
Breaking the data down further, we
1.5 see that the period since 1995 has
1.0
been characterised by a long appreci-
ating trend (1995 to 2001) and a long
0.5
depreciating trend (2001 to present –
0.0
Figure 2).
-0.5
... the period since 1995 has been
-1.0 characterised by a long appreciating trend
-1.5 (1995 to 2001) and a long depreciating
-2.0
trend (2001 to present
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Each of these periods saw a very dif-
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F ferent average elasticity, with the
Source: Bloomberg, Morgan Stanley Commodity Research estimates
recent period witnessing a much
COMMODITIESNOW SEPTEMBER 2008 39
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