Warning: Use Caution When Investing In Currency ETFs Of Commodity Dependent Nations

by on May 21, 2010

In recent weeks markets have encountered turmoil with prospects for growth around the world being slashed as debt issues in Europe weigh on investors. As investors continue to flee the euro, many are flocking towards the relative safety of the U.S. dollar, further driving up the greenback and dragging down commodity prices. In addition to basic metals, one of the most heavily impacted commodities has been oil, which has plummeted as of late. Traders have seen the price of crude slump from close to $90/bbl. to now down around $70/bbl.–and some see no end to the slide in sight. While this could translate into good news for consumers at the pump, it has been a negative development for oil production firms as well as currencies that are highly dependent on commodities.

Generally speaking, when commodity-intensive economies see rising prices for their main exports, the currencies tend to rise as well. This is because their home currencies are in higher demand as international investors must buy up the currencies in order to purchase these basic exports. Conversely, when commodity prices are declining it tends to have a negative impact on currencies of countries that are main commodity producers. One good example: the Canadian dollar exhibits a correlation of 80% to the price of oil . Likewise, Australia, the world’s third largest miner of gold, had its dollar experience an 84% correlation with the price of gold over the past decade. While most currencies have had a rough quarter as the dollar has improved, they are nevertheless greatly impacted by their main exports. Due to these heavy correlations, we took a look at seven currency ETFs that are often heavily impacted by commodity markets.

Rydex CurrencyShares Australian Dollar Trust (FXA)

In addition to gold, coal, iron ore, and natural gas are some of the biggest exports of Australia (PDF). While the vast majority of these exports have seen their prices surge in 2010, the threat of a ‘super tax’ on natural resource firm profits threatens to decrease the production across the country and severely cut down on the demand for the Australian dollar. FXA is down almost 11% over the past month and down 7% over the past week as the tax has come into greater focus (also see Australia ETFs Surge On Interest Rate Hike).

Rydex CurrencyShares Canadian Dollar Trust (FXC)

Canada’s economy is high dependent on the price of oil; the country is currently the 4th largest exporter of oil in the world, just behind the UAE and ahead of Norway. As such, FXC has experienced weakness as of late as the price of oil continues to slide. FXC is down 4% over the past week and more than 6% over the past month (also see Definitive Guide To Short Dollar ETFs).

WisdomTree Dreyfus Brazilian Real Fund (BZF)

Brazil is a huge exporter of agricultural products such as soybeans, coffee, and beef. With a strengthening dollar the price of most of these commodities have been under pressure sending COW and DBA both down about 5.5% over the past month. This has negatively impacted BZF, sending the real ETF down 5.8% over the past month. See more return data for BZF here.

WisdomTree Dreyfus New Zealand Dollar Fund (BNZ)

The main exports of New Zealand are largely agricultural-based, consisting of wool, dairy products, and timber. These products have been severely impacted as of late with timber leading on the downside; the iShares S&P Global Timer & Forestry Index Fund (WOOD) is down almost 16% over the past month. This decrease in prices for many of New Zealand’s top exports has had a negative effect on BNZ over the past month; the fund is down 5.7% in that time period and has produced a loss of almost 17% over the past 26 weeks (see technical analysis of BNZ here).

CurrencyShares Russian Ruble Trust (XRU)

The Russian economy is highly dependent on a variety of basic materials for its exports. The country is a major exporter of oil and natural gas, which have been down sharply as of late. However, the country is also the top exporter of platinum group metals, which have performed better than oil in 2010 but have been pummeled as of late (see Palladium ETF Plunges, Now Screaming “Buy”). XRU is down 4% over the past week.

Rydex CurrencyShares Mexican Peso Trust (FXM)

The Mexican government is highly dependent on oil in order to obtain revenue for its budgets. Not surprisingly, as the price of oil has slumped so has FXM; it is down almost 7% over the past month. However, much like Russia, Mexico also has mines a large amount of precious metals; currently the country is the second largest miner of silver in the world. This has helped to buoy the peso since the iShares Silver Trust (SLV) has gained about 12% over the past quarter, a fact that has helped to decrease some of the losses that the peso might have experienced if its economy was solely dependent on oil for exports.

WisdomTree Dreyfus South African Rand (SZR)

Much like the Russian ruble, the South African currency is somewhat dependent on platinum demand, but the rand is also heavily influenced by gold as well. This has been good news for investors in the rand since the Gold Trust SPDR (GLD) has surged over the past month (see Five Safe Haven ETFs For Riding Out The Storm). Still, SZR is down almost 6% for the last week.

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Disclosure: No positions at time of writing.