Aussie lags as Fed hike bets lift dollar: what commodity currencies are

The Australian dollar was the weakest major currency at the end of the week, as bets on more US rate hikes kept the dollar in demand. In the ECB reference rates for Friday, 13 November, AUD/USD fell 0.52% to 0.6785, a bigger drop than EUR/USD (down 0.26%) or GBP/USD (down 0.22%).

investingLive's Americas wrap summed up Friday's session as "USD leads, AUD lags". It noted that Fed officials Susan Collins and Mary Daly both backed more tightening after the US producer price data. Investing.com reports the dollar posted its biggest weekly gain since September. Other raw-material-linked currencies also struggled: Investing.com says Chile's peso hit a 19-month low as copper dropped, and the Canadian dollar held near a one-month low. You can follow the Aussie on this AUD/USD chart.

What is a commodity currency?

A commodity currency is the money of a country whose economy depends heavily on exporting raw materials. Commodities are basic goods such as metals, energy and farm products. The Australian dollar, the Canadian dollar, the New Zealand dollar and the Chilean peso are common examples.

When foreign buyers want more of a country's exports, they often need its currency to pay. So these currencies tend to rise and fall with the prices of the goods the country sells. They also tend to react to global risk mood. When investors get nervous, they often sell commodity currencies and buy the US dollar.

The link is a tendency, not a rule. investingLive reported that WTI crude oil rose 43 cents on Friday, yet USD/CAD still edged up 0.06% to 1.4258 in the fixing, meaning the Canadian dollar did not gain. This week, US interest-rate expectations mattered more than commodity prices.

A worked example

Let us compare the week using the ECB fixings from Monday, 9 November, to Friday, 13 November.

AUD/USD: 0.6894 to 0.6785.

• Change: 0.6785 − 0.6894 = −0.0109
• Percentage: −0.0109 ÷ 0.6894 = −1.58%

EUR/USD: 1.1193 to 1.1052.

• Change: 1.1052 − 1.1193 = −0.0141
• Percentage: −0.0141 ÷ 1.1193 = −1.26%

NZD/USD: 0.5613 to 0.5532, a fall of 0.0081, or −1.44%.

USD/CAD: 1.4103 to 1.4258, a rise of 0.0155, or +1.10%. Here the US dollar is the first currency, so a higher number means a weaker Canadian dollar.

Now make it personal. Say you held 10,000 Australian dollars and measured them in US dollars. At Thursday's fixing of 0.6821 they were worth 10,000 × 0.6821 = 6,821 US dollars. At Friday's 0.6785 they were worth 6,785 US dollars. That is 36 US dollars less in one day, with no change in the Australian dollar amount you held.

The commodity group (AUD, NZD, CAD) all weakened against the dollar over the week, and the Aussie fell further than the euro.

Why it matters for new traders

If you trade AUD, NZD or CAD, you are partly exposed to forces outside those countries. Metal and energy prices, global growth worries and US rates can all move them. A Fed story can hit the Aussie harder than the euro, as this week showed.

It also helps to know that these currencies often move together. If you hold several of them at once, you may be taking one big bet on the US dollar and risk mood rather than several separate ones.

Finally, check whether the commodity link is actually working. This week oil rose while the Canadian dollar stayed soft. For more on the Fed comments that drove the dollar, see fxcash.com's report on Fed's Daly and Collins backing hikes as the dollar ended its best week since September. You can also watch the loonie on this USD/CAD chart.

Key terms

• Commodity: a basic raw good, such as copper, oil or wheat.
• Commodity currency: a currency whose value tends to follow its country's raw-material exports.
• Aussie, Kiwi, Loonie: trader nicknames for the Australian, New Zealand and Canadian dollars.
• Rate hike: a central bank raising its interest rate.
• Reference rate (fixing): an official exchange rate published once per business day, here by the ECB. It is not a live quote.