The dollar’s relationship with commodities was in full force last week. The sharp increase in the price of oil (up more than 10% since April 8) was in stark contrast to the dollar, which fell sharply against its G10 counterparts, as you can see in the chart below.
The relationship between the dollar and commodities is a bit chicken-and-egg—what came first? Did the dollar cause commodities to rise, or was it the other way round? While this is a difficult question to answer, there is one part of the G10 FX space that can be affected: the commodity bloc of currencies.
As you can see in the chart below, the biggest movers were the NOK and the CAD, all up more than 3.5% last week vs. the U.S. dollar. Norway and Canada are some of the largest producers of oil in the G10 space, so a 10% rise in the price of crude is likely to have a big impact.
But what about the dollar? The US is a major oil producer, yet the greenback tumbled last week. Even though the US is a major oil producer, the buck is not considered a commodity currency; instead, it tends to be lumped with the safe-haven currencies. As you may have guessed, labels can stick in the currency market.
So where will these currencies go next? The Nokkie and the loonie have both lost ground vs. the USD since the start of the year. The NOK had a renaissance at the start of this month, but USD/NOK was already finding support ahead of 7.68 – the 100-day sma, as the crude oil price lost some ground on Friday. Thus, the strength of the Nokkie’s comeback could be determined by where the price of oil goes next.
The CAD is more interesting. It has been outperforming the dollar in recent weeks and USD/CAD has tested some critical levels of support including the 100-day sma at 1.2214 after peaking above 1.28 in March. Interestingly, the correlation between oil and CAD has weakened this month. In March, the correlation with Brent was 62% while it was 68% for WTI. So far in April, the correlation has slipped to 42% with Brent and 53% with WTI. We continue to think that the oil price will be a major driver of the CAD; however, a spate of better economic data including CPI, retail sales and an optimistic tone from the Bank of Canada could protect the CAD compared to the other commodity currencies if the oil price loses ground this week.
Overall, commodities and currencies have a strong link, as we saw last week. However, there are many drivers of the forex market, so be careful not to rely too heavily on the oil price when trading the commodity bloc, especially the CAD.