The conflict in the Middle East is the latest reminder of how commodities reshape the geopolitical landscape, placing the currencies of Norway, Canada, Australia, and New Zealand in a strong position to outperform their larger rivals.
These “commodities currencies” – named for their strong correlation with the health of their countries’ main exports – rank among the best performers in the ten developing market economies: the Norwegian krone and the Australian dollar, or “Aussie.”
Both have seen a gain of over 7% against the US dollar since the beginning of the year, while the conflict causes the most severe global energy disruption in history, with chain reactions affecting economies worldwide.
Some investors see potential for even larger gains, as a more fragmented global order, driven by the unilateral shift of the United States and the rise of China, pushes nations to prioritize energy security and secure essential commodities for AI development and green transition.
Manish Kabra, multi-asset strategist at Société Générale, noted a “major disconnect” between the relative underperformance of commodities currencies and the surge in the commodities index in recent years, leaving these currencies with significant room for growth.
He pointed out that one adjustment made since the start of the conflict in the Middle East was to reduce exposure to the euro in favor of the four commodities currencies, on an equal-weighted basis.
“The strategic and geopolitical focus on commodities currencies is not yet priced into these four currencies,” Mr. Kabra stated.
Lauren van Biljon, senior portfolio manager at Allspring Global Investments, recently took a long position – a bet on the rise in value of an asset – on the Norwegian krone against the pound sterling.
As a major producer of oil and gas, Norway is a key player in Europe’s energy security, especially as it moves away from Russian supplies due to the war in Ukraine.
Ms. Van Biljon explained that the pivot towards commodities currencies was one of the reasons for this move, with the anticipation of a restrictive stance by the Norwegian central bank against rising energy costs being another.
Rabobank expects a weakening of the euro against the krone and also recommends selling the pound sterling against the Norwegian currency.
At around 9.37 to a dollar, the krone is trading at levels close to its highest since 2022.
Australia, Canada, and Norway all benefit from a AAA-rated sovereign debt and a status as net energy exporters, providing investors concerned about the global status of the dollar with alternatives to the euro and the yuan, amid increased demand for commodities.
THE COMMODITIES RALLY IS A SUPPORT, BUT RISKS FROM THE WAR ON GROWTH PERSIST
A new order of commodities is emerging, defined by geopolitical fragmentation, electrification, supply constraints, regionalization of energy and material markets, and a reorganization of global supply chains, as highlighted by investment firm Ninety One in a note published last week.
This could explain the strong start of the entire commodities complex this year.
This asset class is by far the best performer since the beginning of the year, rising about 42% compared to a 6% increase last year, according to BofA research.
Oil has seen dramatic movements due to the war involving Iran and is trading just below $100 per barrel, while copper has reached six-week highs. And although gold has recently retreated, it remains up about 50% from last year.
Mr. Kabra from SocGen pointed out that the US government’s decision last November to include copper on the list of essential minerals for the economy and national security demonstrates the importance of commodities in geopolitics.
Commodities currencies are, of course, vulnerable to fears of the war’s impact on economic growth, and the resurgence of the US dollar as a safe haven in recent weeks has somewhat diminished their appeal.
Overshadowed by the greenback at the start of the conflict, the Canadian, New Zealand, and Australian dollars are rebounding in hopes of a ceasefire.
Australia, a major mining power, is also a major net exporter of coal and liquefied natural gas but depends on imports for refined petroleum products.
“In the immediate future, the focus is on energy independence and security,” said Malin Rosengren, portfolio manager at RBC BlueBay Asset Management, noting Australia’s vulnerability on this front.
“Then, the second aspect will be the impact on medium-term growth in terms of the perception of the influence of commodities on exchange rates.”
COMMODITIES CURRENCIES WELL POSITIONED FOR WAR AND PEACE
Even if the conflict in the Middle East is resolved, energy costs are expected to remain high for some time. Energy flows will not normalize immediately, and issues such as infrastructure damage will need to be addressed.
This is an opportunity to invest in commodities currencies, according to Van Luu, global head of solutions strategy at Russell Investments.
“If oil prices are between $85 and $100 instead of $65, then energy exporters from politically stable countries, if we include Norway and Canada in this group, should fare better,” he said.
Mr. Luu emphasized that he was maintaining exposure to these currencies.
Regardless of the outcome of current efforts to end the war, commodities currencies are expected to remain a good bet, according to Andreas Koenig, global head of FX at Amundi, Europe’s largest asset manager.
While global turmoil has propelled them into the spotlight, they are also poised to benefit from a return to relative stability.
“They remain high-beta currencies and benefit from risk appetite,” he concluded.
