As commodities reshape geopolitics, currency pecking order gets a reset

LONDON: The war in the Middle East is the latest reminder of how commodities are reshaping the geopolitical landscape, leaving currencies from Norway, Canada, Australia, and New Zealand well placed to outperform larger rivals.

These commodity currencies - so called due to their close correlation to the fortunes of their countries’ main export commodities - include two of the best performers among 10 developed market economies: the Norwegian crown and Australian, or Aussie, dollar.

Both are up over 7 percent versus the US dollar for the year so far

as the war creates the worst global energy disruption in history with knock-on effects for economies worldwide.

And some investors see potential for even bigger gains as an increasingly fragmented global order accelerated by the United States’ go-it-alone shift and the rise of China drives nations to prioritise energy security and secure commodities essential to the AI-buildout and green transition.

Manish Kabra, multi-asset strategist at Societe Generale, noted a “big disconnect” between the relative underperformance of commodity currencies and a booming index of commodities in recent years, leaving the currencies ample room to rally.

He said one shift he has made since the start of the conflict in the Middle East was to reduce exposure to the euro and increase exposure to the four commodity currencies on an equal-weighted basis.

“The strategic and geopolitical focus on commodities has yet to be priced into these four commodity currencies,” Kabra said.

Lauren van Biljon, a senior portfolio manager at Allspring Global Investments, said she had recently moved to a long position - a bet an asset will rise in value - on Norway’s crown against sterling.

A major oil and gas producer, Norway is a linchpin of Europe’s energy security, particularly as it weans itself off Russian supplies due to the Ukraine war.

Van Biljon said the pivot to commodity currencies was one reason for the move, another being an expectation for a hawkish Norwegian central bank given rising energy costs.

Rabobank said in a note it expected the euro to weaken against the crown and favoured selling sterling against the Norwegian currency as well.

At around 9.37 per dollar, the crown is trading near its strongest levels since 2022.

Australia, Canada and Norway boast both AAA-rated sovereign debt and net energy-exporter status. This, alongside increased focus on commodities, gives investors worried about the dollar’s global status alternatives beyond the euro and yuan, analysts said.

Commodity rally a boost, but war’s risks to growth remain

A new commodity order is taking shape, defined by geopolitical fragmentation, electrification, supply constraints, regionalisation of energy and materials markets, and a re-ordering of global supply chains, investment firm Ninety One said in a note published last week.

This may help explain the blistering start to the year for the broad commodity complex.

The asset class is by far the best performer so far this year, up roughly 42% versus a 6% gain last year, BofA research shows.

Oil has seen some eye-popping moves due to the Iran war and is trading below but near USD100 a barrel, while copper is at six-week peaks. And although gold has retreated recently, it is still up some 50% from a year ago.

SocGen’s Kabra said the US government’s decision to include copper last November in a list of minerals it deems essential for the economy and national security shows the significance of commodities in geopolitics.