Commodity FX pairs bucking the trend

The Aussie, Kiwi dollar – the Commodity currencies – have been rising alongside commodity prices, bucking the trend typically seen during risk-off periods in the market.

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These aren't normal times

Both the Australian dollar and New Zealand dollar bottomed in late January and have been rising through February and into March. What might have surprised many traders is that both currencies also continued higher after Russia invaded Ukraine. The Aussie and Kiwi are considered ‘risky currencies’ and tend to sell off alongside other risky assets like stocks.

A simple explanation is that these currencies represent big commodity-exporting nations and commodity prices have been going through the roof. Additionally, it helps that both countries are far away from the conflict and are less likely to be affected negatively by sanctions on Russia. Australia might end up being one of the beneficiaries due to increasing demand for its exports to make up for the shortfall from Russia.


Commodity trade balances

Europe imports 67% of its coking coal from Russia. It also imports about half of its thermal coal as well. If the situation between Russia and the EU were to get more acute, or if Europe was looking to diversify the sources of its raw materials, Australia is one of the candidates to supply both coking and thermal coal.

Russia is also the fourth-largest producer of steel globally, using ore sourced domestically. If the rest of the world were to increase steel production to offset the effect of sanctions, then Australia's key export price would likely continue to rise.

Some of Australia's top exporting industries are oil & gas, LNG, and grains, including wheat. Commodities struggling to reach mainly the EU due to the war, either from Russia or Ukraine, can be substituted by Australia's. It seems the Aussie can reap some good rewards. New Zealand's exports, on the other hand, are on agricultural commodities, mainly dairy, meat, and wood.


The monetary policy angle

The Aussie and Kiwi are intimately linked through arbitrage and being each other's major trade partners. While the RBA has been loath to raise rates, the RBNZ has pushed forward with a tighter monetary policy, supporting the NZD and to a lesser extent the AUD.


AUD/USD, NZD/USD & EUR/AUD

The AUD/USD & NZD/USD have seen strong gains off the lows in late January – marking a stark contrast with European currency pairs – the GBP/USD and EUR/USD that have dropped sharply.

Source: Spreadex trading platform

Source: Spreadex trading platform

Source: Spreadex trading platform

Key takeaways

Extra demand globally for key commodity imports from Australia and New Zealand to replace some of those lost by Russia and Ukraine over sanctions and the conflict has been supporting the AUD & NZD.

The currencies are off their highs – offering a pullback opportunity for bulls to join the uptrend – but if commodity prices are close to a top, these FX pairs may have already topped too and maybe on course to catch down to their weaker European counterparts – the EUR & GBP.