Three currencies actively traded on the forex market are heavily influenced by the prices of commodities, these being the Australian, Canadian, and New Zealand dollars. These commodity currencies are at or just past the peak of their cycle, with further downside trending potential.

The Canadian dollar is influenced by prices for crude oil, gold, and forestry products, as well as the trade balance with its major trading partner, the United States. The decline in the U.S. housing market has weighed on Canadian building materials while slumping U.S. auto sales have dragged down Canadian automotive-related goods, and all of these have been influenced by the shifting value of USD/CAD.

The Australian dollar is influenced by prices for coal, gold, and iron ore. Although trade remains brisk with some trading partners—China, Japan, Korea, and New Zealand—if the global economy stalls that may weigh on Australian exports over time, reducing the important balance of trade from a surplus to a deficit and lowering GDP growth as a result.

The New Zealand dollar is influenced by prices for dairy products, meat, and wood, and to a lesser extent crude oil. Most important for NZD is the intrabank interest rate, as the nation has become a favourite for the carry trade and any lowering of that rate will depreciate its value, especially against the yen, the Swiss franc, and the U.S. dollar.

Commodity prices were high through the early part of 2008 for various reasons, including supply and demand issues, possible market speculation, and the low value assigned to the U.S. dollar. Because most commodities are priced in USD, when it depreciates commodities prices rise in an inverse relationship. As the tide of the global economy has turned, with USD appreciating in relative value and other currencies around the world depreciating in comparison, commodities have fallen for this reason, among others.

The effect of this cycle on the commodities currencies is multilayered. Lower commodities prices mean these nations receive less for exported goods, which lowers the balance of trade, feeds less wealth into their economies, and reduces GDP growth, directly inhibiting their currency’s value. In addition, the slower pace of growth tends to reduce inflationary pressures, thereby encouraging the central bank to reduce intrabank interest rates, indirectly inhibiting that value. Lower interest rates also reduce the currency’s appeal for investors dabbling in the carry trade, a scheme in which funds are borrowed in a nation with a low interest rate and then invested in one with a higher rate. The investor earns the spread between the rates but risks losing earnings and capital from currency market fluctuations. Although the carry trade does not extend to CAD, it strongly affects AUD and NZD.

With global investors removing their funds from declining commodities and equities markets, and turning increasingly to Treasuries, this shifting balance may drive commodity prices even lower. The extent of this effect will be determined by the ongoing fallout from the subprime mortgage crisis and the resultant credit crunch, with investors preferring “hard assets” such as gold and other commodities when financial times are uncertain, and somewhat offset by the relative strength of USD. If commodities prices continue to fall, so will these three currencies.