FYI | Feb 03 2009
By Chris Shaw
When commentators talk of commodity currencies the Australian, New Zealand and Canadian dollars are traditionally at the forefront of investor thinking, but as Standard Chartered points out African currencies are also viewed by the market as currencies closely linked to commodity prices given Africa’s exports are heavily weighted to primary products.
United Nations Conference on Trade and Development data show exports of ores, metals and fuel products accounted for 74% of all African exports in 2006 against just 18% of exports being of manufactured goods. This would tend to support such a view of the African currency group.
The reality though is somewhat of a less direct relationship as on the group’s analysis high frequency correlation data show few obvious links but monthly frequency data generate a stronger correlation. This leads Standard Chartered to suggest commodity prices have little use as a short-term trading signal for the African currency group, but they do offer a better signal for long-term investors or corporates looking to hedge exposure.
The data show the relationship varies from currency to currency depending on the export mix of the nation in question, with those nations involved in the export of oil, copper or gold generally showing a higher level of currency correlation to commodity prices.
In Standard Chartered’s view, the commodity price outlook is one of gradual improvement through 2009 and 2010, this despite some short-term downside risks for the likes of oil and copper. Assuming such an outcome, the group is generally encouraged on the outlook for African currencies, though it suggests it could take some time for conditions to turn favourable enough for portfolio and foreign direct investment flows to return to levels that would prompt a broad-based revival in currencies in the region.
Having a relatively positive view on the outlook for oil prices in particular leads the group to suggest improvement in the oil market may generate some stability in the oil-linked currencies in the region, which would be good news for the likes of the Nigerian naira.