As raw materials reshape geopolitics, currency hierarchy resets

The Middle East conflict is the latest reminder of how commodities reshape the geopolitical landscape, putting the currencies of Norway, Canada, Australia, and New Zealand in a strong position to outperform their larger rivals.

These “commodity currencies” – named for their strong correlation with the health of their respective countries’ main exports – are among the top performers in the ten developing economies: the Norwegian krone and the Australian dollar, or “Aussie.”

Both have seen an increase of over 7% against the US dollar since the beginning of the year, while the conflict causes the most severe global energy disruption in history, with ripple effects on economies worldwide.

Some investors see the potential for even greater gains as an increasingly fragmented global order, fueled by the US’s unilateral turn and China’s rise, prompts nations to prioritize energy security and secure essential commodities for AI development and the green transition.

Manish Kabra, a multi-asset strategist at Société Générale, noted a “major disconnect” between the relative underperformance of commodity currencies and the surge in commodity prices in recent years, leaving room for substantial gains in these currencies.

He mentioned that one adjustment made since the start of the Middle East conflict was to reduce exposure to the euro in favor of the four commodity currencies, on an equal-weighted basis.

“The strategic and geopolitical focus on commodities is not yet fully priced into the exchange rates of these four currencies,” stated Mr. Kabra.

Lauren van Biljon, senior portfolio manager at Allspring Global Investments, recently took a long position – a bet on the rise in value of an asset – on the Norwegian krone against the British pound.

As a major oil and gas producer, Norway is a cornerstone of Europe’s energy security, especially as it moves away from Russian supplies due to the war in Ukraine.

Ms. Van Biljon explained that the pivot to commodity currencies was one reason for this move, with the anticipation of a restrictive stance by the Norwegian central bank against rising energy costs being the other.

Rabobank stated in a note it expects the euro to weaken against the krone and also recommended selling the pound sterling against the Norwegian currency.

Trading at around 9.37 to the dollar, the krone is close to its highs since 2022.

Australia, Canada, and Norway benefit from both AAA-rated sovereign debt and net energy exporter status. According to analysts, this provides investors concerned about the global status of the dollar with alternatives to the euro and the yuan, amid increased demand for commodities.

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The Middle East conflict presents an opportunity to invest in commodity currencies, as energy prices are expected to remain high for some time, even if the conflict is resolved. Energy flows will not normalize immediately, and issues like infrastructure damage will need to be addressed.

No matter the outcome of current efforts to end the war, commodity currencies are expected to remain a good bet, according to Andreas Koenig, global head of foreign exchange at Amundi, Europe’s largest asset manager.

While global turmoil has thrust them into the spotlight, they are also poised to benefit from a return to relative stability.

“They remain high-beta currencies and benefit from risk appetite,” he concluded.