Garrabrant Progress 1

Commodity Prices and Exchange Rates

Through the research of my topic I was able to find several documents that support my belief that there is an exceptionally strong correlation between the exchange rate in a particular country and the prices of the commodities that the country deals with heavily.

One such document states that in 2005, oil and gold set record highs and were two of the biggest drivers of currency movements. The document goes on to say that in the time period between 2003 and 2005, the correlation between the Canadian dollar and oil prices was approximately 20 percent. The Canadian oil sands are one of the world's largest sources of crude oil. This would explain why the Canadian dollar moves so closely hand in hand with the price of oil.

The document also discusses how Japan's dependency on foreign energy makes its currency very susceptible to the changing oil prices. Japan imports 99 percent of its oil, as opposed to the 50 percent that the United States imports. As a result of this, when oil prices rise, the Japanese economy suffers.

Australia is another country who's currency relies heavily on commodity prices. For Australia, gold is the big mover since Australia is the world's third larges gold producer. The Australian dollar has an 85 percent correlation with the price of gold.

This information has led me to believe that I am on the right track with my assumptions and further research and calculations, which will be laid out later, will serve to further prove my assumptions.

Lien, Kathy. Commodity Prices And Currency Movements. Investopidia. Accessed 4/2/09. http://www.investopedia.com/articles/forex/06/commoditycurrencies.asp

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