Hedging Commodity Currencies: Challenges and Opportunities

The need to forecast FX direction is vital and can directly influence your selection of hedging instruments.

Just as there are numerous market forces that can potentially drive any currency’s direction, there are additional tools and indicators available to corporate treasurers to help determine a commodity currency’s direction.  

While traditional methods of looking at currency forecasts are still of value, a greater set of inputs are required for commodity currencies. The challenge, however,  then becomes how to determine which forces currently most influence movements in the currencies in which you have exposure at a specific point in time. Fortunately, there are new analytics available to the markets, which corporate treasurers can utilize to assist in keeping abreast of this situation.

Determining any Actual Relationship to Commodity Prices

The first challenge is to determine if your commodity currency is actually tracking any underlying commodities.  Strong relationships develop from time to time,  but these relationships can break down when there are other greater influences at play.

Let’s examine the case of the Canadian dollar (CAD). After a prolonged time of almost an inverse relationship, the CAD is now again closely tracking commodity prices.

The one-year chart below illustrates the strong direct relationship between CAD and the US dollar (USD) (the blue line and the inverse of USD/CAD), and the Bloomberg Commodity Index (the red line) re-formed in late June 2014.
 

Chart 1: Relationship Between Canadian and US Dollars and the Bloomberg Commodity Index:

 


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