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“In theory, an improvement in the terms of trade should lead to a stronger currency,” said Bank of America researcher Athanasios Vamvakidis.
For now, this theory is a reality for global currencies and it may continue to be so for some time to come.
A Bank of America study reveals that the Australian dollar, the Canadian dollar and the krone have been the top performing major currencies since the summer in the northern hemisphere, thanks to soaring commodity prices.
Importantly, the trends that have helped these currencies are expected to continue.
âSince the summer, the best performing currencies in the G10 include the NOK, CAD and AUD, while the worst performing currencies include the JPY and EUR in prices and especially in energy. may have more to do, âsays Vamvakidis in a research briefing.
The Canadian dollar was the best performing major currency last month, followed by the Norwegian krone and the Australian dollar.
What unites these currencies is the support they derive from oil and gas exports, which will generate greater returns in a desperate global energy market.
Above: The Canadian dollar has dominated the crown and the Australian dollar in terms of outperformance over the past month.
Crude oil is Canada’s main export, as is Norway. For Australia, coal and natural gas are the second and third most important exports.
This set of outperforming currencies are also routinely described as ‘high beta’ currencies as they track the performance of global markets, which have been steadily recovering from the depths of the Covid panic of 2020.
However, according to Vamvakidis, this characteristic of âhigh betaâ was less determinant in the outperformance of the Australian dollar and co.
“This is not motivated by risk sentiment, as global equities have weakened during this time,” he said.
Above: Change in terms of trade and exchange performance. “We are seeing a strong correlation between the development of the terms of trade and the G10 FX since the summer” – Bank of America Global Research.
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“The sudden fluctuations in commodity prices have led to major changes in the G10’s terms of trade, depending on whether a country exports or imports commodities, and in particular energy,” explains Vamvakidis.
Australia’s trade balance is at record highs, thanks to continued demand for iron ore, but more recently thanks to strong demand for coal and natural gas.
It was reported on October 5 that Australia posted another record trade surplus in August as export earnings increased amid continued strong demand for commodities.
The trade surplus jumped from A $ 2.4 billion to A $ 15.1 billion in August, beating expectations for a reading of A $ 10 billion.
This is the third consecutive record for the trade surplus.
âAustralia’s widening trade surplus indicates strong underlying demand for AUD,â said Elias Haddad, economist at the Commonwealth Bank of Australia.
Regarding the euro and the yen, Bank of America believes that these two currencies were the weakest and also saw their terms of trade deteriorate the most, again not surprisingly because it is the two G10 economies that matter. the most energy.
The pound is less affected as gas production in the North Sea means that at least part of domestic demand is met by domestic production.
While the UK was self-sufficient in gas until 2004, it can now only meet half of its gas needs.
However, this represents much more self-sufficiency than in the euro zone and in Japan.
Bank of America says recent trends in the currencies of power producers benefiting and those of struggling energy importers may spread.
âThese correlations are not always strong, but they are strong right now and indicate new momentum in current currency trends,â Vamvakidis said.