Changes in the Relationship between Currencies and Commodities

This paper examines the relationship between so-called commodity currencies and commodity prices in recent years. Commodity prices have fluctuated significantly during this time period. Commodity currencies -- the currencies of large commodity exporters such as Australia, Canada, Chile, and South Africa -- have experienced large swings together with commodity prices. The paper identifies the basis of the co-movements between commodity currencies and commodity prices, and checks the statistical data to see whether there are any changes in the relationship between commodity currencies and commodity prices. The results show that commodity currencies have developed a stronger relationship with major commodity indexes rather than with the unique commodities the countries produced. In addition, it is found that commodity currencies used to have forecasting power in terms of commodity prices, but have lost that power in the course of the "financialization" of commodities. These changes may cause higher volatility in both markets and hence should be kept in mind in the monitoring of international financial markets.