The huge commodity rally of the past four years has affected government finances around the world and has led to significant trade surpluses for exporters, particularly crude oil exporting nations.
In one of the many cruel jokes of economics, only a few resource exporters have even modestly deep and liquid markets for their currencies.
Nigeria, Venezuela, and the United Arab Emirates may be significant crude oil exporters, but do currency traders really wish to dabble in the naira, bolivar, and dirham, respectively? The temptation, then, is to do something functionally equivalent to looking in the well-lit corner of the room, regardless of whether you lost something there or not. Currencies such as the Canadian and Australian dollars (CAD and AUD), and to a lesser extent the South African rand (ZAR), Russian ruble (RUB), and Chilean peso (CLP), are regarded as commodity proxies by many traders.
As is the case with many generalizations and stereotypes, there is a measure of truth to these characterizations. Let’s take a look at some key commodity/currency relationships and see whether these are as significant as tried-and-true valuation techniques for currencies, such as interest-rate differentials.
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