Commodities | Mar 05 2008
By Chris Shaw
As commodity prices have enjoyed rapid gains in recent weeks attention has turned to whether or not the price moves are a reflection of stronger demand or weakness in the US dollar, which would imply a re-pricing of commodity costs into other currencies.
To attempt to determine whether the gains are demand or currency related Silicon Valley Bank senior advisor Laurence Hayward has completed an analysis factoring in the US dollar and five other currencies – the euro, the British pound, the Canadian and Australian dollars and the yen, along with five commodities – gold, oil, natural gas, wheat and corn.
The result of Hayward’s analysis done on prices from the end of September to the end of February is as currencies strengthen agains the US dollar so too do commodity prices, but also evident is the fact the increases in percentage terms in commodity prices were significantly larger than were the movements in currencies.
As evidence of this Hayward notes currency movements in the period ranged from a gain of around 5% for the Australian dollar to near 10% for the yen, but the Commodity Research Bureau Index rose more than 23% during the same period.
Hayward argues this supports the conclusion while commodity costs in non-US dollar terms have increased the changes have not been to the same extent as the changes in US dollar terms, meaning while there is a directional relationship between commodity prices and currencies there is no evidence of a de-coupling of commodity costs away from US dollars.
