CURRENCIES & COMMODITIES
stronger relationship, suggesting an
asymmetry in the relationship Figure 4: Positive Relationship Between USD Direction &
between currencies and commodities.
USD-Commodity Correlation
If we look over the history of the (Left Axis: 36-month correlation coefficient for trade-weighted USD and
floatingUSDperiod,whichbeganwith
commodity prices; right axis: trade-weighted USD (DXY),
36-month moving average, %change)
the closing of the gold window in
1971, the correlation between the
USD and commodities has seemed to
mirror the trend in USD appreciation.
... commodity prices have historically lost
less from a rising USD than they
have gained from a falling USD
Specifically, in periods of USD
strengthening, as defined by the 36-
month moving average monthly
change, the 36-month correlation
became less negative or even positive
overcertainperiods(Figure4).Equally,
Source: Bloomberg, Morgan Stanley Commodity Research estimates
a depreciating USD trend was consis-
tent with a strengthening in the natu-
ral negative correlation. Net, because
Figure 5: Energy & Base Metals Most Liquid to Buck a
commoditypriceshavehistoricallylost
Rising Buck
less from a rising USD than they have
(Left Axis: 36-month correlation coefficient for trade-weighted USD and
commodity prices; right axis: trade-weighted USD (DXY),
gainedfromafallingUSD,anear-term
36-month moving average, %change)
appreciation in the USD should bring
less of a headwind than is likely
expected in the market.
This relationship seems to have bro-
ken only twice: in the mid-1980s and
thelate-1990s–andbothperiodswere
characterised by a currency crisis. The
first period saw an unsustainable
widening in the US deficit against
world economies (mainly Europe and
Japan)andeffortsweretakentodeval-
uetheUSDtocorrecttheglobalimbal-
ances. The second period saw large
devaluations of emerging market cur-
renciesfollowingtheAsiancrisis. Source: Bloomberg, Morgan Stanley Commodity Research estimates
... historically, commodities
Finally, not all commodities are likely to react the same. In fact, his-
have responded quite torically commodities have responded quite differently to trends in
differently to trends
the USD (Figure 5). Energy, base metals and livestock have seen the
in the USD
largest erosion of the negative correlation, while precious metals and
agriculture have seen a more stable correlation
•
Many in the market now expect the
USDtocontinueitscurrentrally,which
Hussein Allidina, CFA
has historically acted as a drag on
E: hussein.allidina@morganstanley.com
commodity prices. But if the USD ral-
Jeremy R Friesen
lies because it was oversold against
E: jeremy.friesen@morganstanley.com
globalcurrencies,whichthemselvesare
being devalued through loose mone- Footnotes
tarypolicy,wearelikelytoseethiscor- 1. DXY is a trade-weighted USD index with weights of: 57.6% EUR, 13.6% JPY, 11.9% GBP,
relation decrease and a revaluing USD
9.1% CAD, 4.2% SEK and 3.6% CHF.
maybecomelessofaheadwindthanit
2. Elasticities were estimated using an ARIMAX type specification with the log difference of
was a tail wind through the USD’s
the commodity prices as a function of the log difference in DXY (a trade-weighted USD
series), a constant with an autoregressive and moving average term.
depreciation.
40 SEPTEMBER 2008 COMMODITIES NOW
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