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Mark O' Donnell
 · 
Research Analyst
May 19, 2020
 · 

Commodity currencies strengthen as demand for oil and metals increase

Commodity currencies strengthen as demand for oil and metals increase

Commodity currencies are set to advance as manufacturing and oil usage rise across the world.

The returns of the CAD & AUD against the USD. Note: Lower is better as it means the USD is depreciating against the respective currencies.

The Australian dollar and the Canadian dollar have been stuck within their respective consolidation zone, strengthening over the past couple of days. As the correlation between commodity currencies and commodity prices remain relatively strong, with the Bloomberg commodity index advancing 2.5% to 63.24, the highest since the start of April.

Commodity currencies getting a boost from demand

As China’s oil demand starts to reach pre-Coronavirus levels, manufacturers have started to purchase more iron and copper from Australia. However, tensions between the two countries have slowly risen, possibly dampening the likelihood of a breakout. In this case, China slapped an 80% tariff on Australian Barley exports, a $330 million industry. Many analysts speculate that these tariffs are in response to Australia’s strong push for an independent investigation into China's response regarding the Coronavirus. However, it is more likely due to the Australian government subsidizing exports barely, enabling exporters from Australia to sell them barely at lower than market prices – a process also known as “dumping.”

However, Adam Kibble, an investment specialist at Inisght, is bullish on the Australian dollar, seeing it rally to 70c against the greenback by year-end. Furthermore, he told Bloomberg that “Exiting the virus earlier [Australia], compared to Europe and the U.S., will be very positive for the Aussie.”

Moreover, with the Canadian dollar being sensitive to the change in oil prices, the price of the black gold has strengthened the loonie against the U.S. dollar. As a result, the boost cushions agriculture and commodity exporters into the U.S. Furthermore, other oil sensitive currencies such as the Norwegian Krone and Russian Ruble have strengthened over the past two days as demand for oil increases.

In spite of these currencies rising, today was generally a risk-off day after the risk-on rally yesterday. Here are the leading market moves:

  • SP500 finished lower at 2922, 1% lower than yesterday.
  • WTI and Brent finished lower at $32.50 and 34.68, respectively.
  • Yields on the 2 and 10-year dip to 17 and 69 basis points
  • Gold holds at $1,746.

As a senior analyst at Blackbull markets, Andre Almedia did some excellent technical analysis on the USD/CAD pair. You can watch it here.

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