The U.S. dollar took a hit this week after the Federal Open Market Committee's two-day policy meeting.

Historically when the U.S. dollar weakens, prices on commodities - such as crude oil, gold and metals - tend to strengthen. That also held true for so-called “commodity currencies," which are the currencies of countries like Canada, Australia and the Latin American countries that are heavy commodity exporters.

The correlation between the commodity prices and commodity currencies became quite strong especially after the Great Recession of 2008.

For instance, early in 2016 crude oil hit $26 per barrel – its lowest price in 13 years. Around that time, the currencies of countries that relied heavily on oil exports, such as Brazil, Chile, Colombia and Russia, got battered hard - also hitting 13-year lows.

Even the Canadian dollar fell to its lowest level in 13 years. The Canadian economy does not solely rely on oil exports, but oil revenues had become a larger part of the economy after the recession.

In fact even after crude prices recovered by 50 percent, commodity currencies did not rise as quickly because their economies needed time to recover.


Back then another commodity currency, the Australian dollar, also suffered but not as much, falling to an eight-year low alongside the CRB Index, which tracks a wide variety of commodities. This is due to the fact that Australia's commodity exports are more diversified, including not just oil but also products like iron ore and precious metals such as gold and gems.


All this to say that the link between commodity prices and currencies grew stronger after 2008.

But recently that link seems to be less important.

Two weeks ago, the Canadian dollar strengthened much more sharply than crude oil. Similarly, the CRB Index has actually been coming down. And despite Australia's central bankers clarifying that they are not under pressure to raise rates anytime soon, the Australian dollar remains stubbornly high after its strong rally a week ago.

One reason for this seeming anomaly is that the larger global economy is now in recovery, as the International Monetary Fund confirmed in its World Economic Outlook this week. Consequently there is less reliance on commodities to bolster countries' economic strength.

This is good news for many commodity-exporting countries. It shows that they have found ways to diversify their domestic economies so they are relying less on single industries.

Also, the link between currency prices and countries' monetary policy changes seems to be growing stronger than the link between currencies and commodity prices.

U.S. monetary policy direction used to be the dominant factor directing exchange rates. But with that monetary policy highly predictable today, the focus has switched to other countries' policy changes.

What are your thoughts? Feel free to write to us at and let us know – we always enjoy hearing from you!

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.