How Commodity Currencies Performed Amid COVID-19

The pandemic has been the defining economic event of 2020, overshadowing the usual influences on currency markets like monetary and fiscal policy.  Normally, currencies of major commodity exporters such as Australia, Brazil, Canada, Chile, Colombia, New Zealand, Russia and South Africa track indices weighted to reflect the economic importance of their various raw materials exports. So far in 2020, some of these currencies, notably the Australian and New Zealand dollars (AUD and NZD, respectively) have continued to track their commodity indices closely. Other currencies, such as the Brazilian real (BRL), Chilean peso (CHL) and South African rand (ZAR) have sharply underperformed their respective commodity indices. Currencies like the Canadian dollar (CAD), Russian ruble (RUB) and Colombian peso (COP) fall into an intermediate category.

The key determinant in whether a currency has kept pace with its commodity index appears to be the rate of COVID-19 infections.  The pandemic struck countries at different times and with highly varied mortality rates.  The greater the number of deaths per capita, the more likely the currency has underperformed its respective commodity index on a risk-adjusted basis.

Since currency markets tend to be less volatile than commodity markets, in order to compare their relative direction we calculate the information ratio of both the currency versus the U.S. dollar (USD) and the commodity index (also priced in USD) between February 1 and November 8, 2020.  We then subtract the commodity information ratio from the currency information ratio.  If the number is positive, the currency outperformed the commodity index on a risk-adjusted basis.  If the number is negative, then the commodity index outperformed the currency on a risk-adjusted basis.  The information ratio is the annualized excess return divided by the annualized standard deviation of excess returns, or put more simply, return divided by risk.

Comparing the risk-adjusted performance of the currency minus that of the locally weighted commodity index with the rates of COVID-19 mortality, reveals a negative correlation of -0.63, albeit among a small sample group of only eight nations.  In other words, the greater the impact from COVID-19, the more likely that a currency was to underperform its local commodity index when controlling for the level currency and commodity volatility.