Relationship between AUD/USD and commodities

[Aussiest]

Hello All,

I promise this will be my last question for a while...

I am wondering, what is the relationship between currencies, eg, the value of the USD, and commodities?

For eg, it seems that when the USD goes up (strengthens), commodities prices weaken? And, when commodities weaken, commodity-related stocks, such as BHP and WPL, also weaken slightly.

Is there any way i can stay ahead of what the USD (and other currencies?) are doing, so that i can keep my eye on commodities and hence keep ahead of the trend in commodities stocks?

It seems like a 'chicken and the egg' question: does the currency change, and therefore influence commodities prices? Or, do commodities prices change and then infuence the value of currencies? I have a feeling that the currency is the primary influence, which influences commodities prices, which therefore then play a big part in how our resources stocks are priced

And i guess i forgot to ask, what primarily dictates the direction of the USD?

 

[BentRod]

I am wondering, what is the relationship between currencies, eg, the value of the USD, and commodities?

No Idea.

Not sure if it's Oil,Gold Or Euro leading.:

I don't think it matters though to be honest?
Just react as thing unfold.

 

[Trembling Hand]

It's all got to do with the USD.

 

[Aussiest]

Thanks Trembling Hand.

So, if i work out what drives the USD, i can be (maybe) slightly ahead of the game, in other words, more likely to accurately predict sector movements, prices. Just a theory...

 

[lasty]

Thanks Trembling Hand.

So, if i work out what drives the USD, i can be (maybe) slightly ahead of the game, in other words, more likely to accurately predict sector movements, prices. Just a theory...

I hate to disappoint you but their have many for years trying to work out what the US dollars going to do next.

You may find a pattern or correlation that works for awhile but then it will go off on another tangent.

If you look at AUD/USD.. The currency can be moved by interest rate differentials,economic data,charts trends,commodities..but these are excuses for supply and demand of the currency at one point in time.
I wouldnt be looking at the currency to make judgement on a share position.
Your dicing with death there.

 

[Aussiest]

Hmm, guess i thought if i knew what the USD was doing, then perhaps i could pick commodities movements, which would therefore influence share prices :dunno:.

I usually keep my eye on commodities prices... Maybe it's more about supply and demand rather than what the USD is doing. Just wanna cover all bases .

 

[Spaghetti]

This drives me nuts. I see all the planets align for stronger commodity price for it to be totally offset by FX.

Seems AUD was as speculative as some commodities. Interest rates did drive it quite a bit.

However often (as seen in oil recently) usd is dumped in favour of a commodity. So not supply/demand but currency alternative. This drives down value of USD but AUD goes up so good for consumers as less of the price hike felt but no good for oilers.

So are people selling USD or buying AUD?

My basic feeling is for commodity prices to improve for non usd based commodity business then AUD has to weaken and demand for that commodity to rise.

I know with gold Europe dumped a ton of it to scare people away from gold therefore supporting the USD. They did this because the strength of their currency was making them less competitive so artificial rise in the value of USD helps other economies. Oh such a tangled world we live in.

The trend with commodity stocks, rather than the commodity itself relies also on costs. The aussie going near parity with the USD did our miners no favours at a time capacity restraints put such a heavy pressure on labour and service expense. So even with a price rise in the commodity coupled with a lower AUD a stock still may not rise if costs have exceeded the overall positive net effect. So what is good for the consumer not so good for the miner, we need a nice balance.

Gold great example of this. I did a lot of research on gold stocks, the currency impact, the cash costs POG forcast and felt that costs would exceed any POG increase for some time to come. So my research led me to avoid gold stocks. I did not make any money but sure did save losing some.

So add costs to AUD/USD and commodity prices equation and you get a better picture of where miners are at and aslo why specs haven't a hope for a while unless very high quality low costs operation.

 

[Paladin]

I know with gold Europe dumped a ton of it to scare people away from gold therefore supporting the USD. They did this because the strength of their currency was making them less competitive so artificial rise in the value of USD helps other economies. Oh such a tangled world we live in.

The trend with commodity stocks, rather than the commodity itself relies also on costs. The aussie going near parity with the USD did our miners no favours at a time capacity restraints put such a heavy pressure on labour and service expense. So even with a price rise in the commodity coupled with a lower AUD a stock still may not rise if costs have exceeded the overall positive net effect. So what is good for the consumer not so good for the miner, we need a nice balance.

Gold great example of this. I did a lot of research on gold stocks, the currency impact, the cash costs POG forcast and felt that costs would exceed any POG increase for some time to come. So my research led me to avoid gold stocks. I did not make any money but sure did save losing some.

So add costs to AUD/USD and commodity prices equation and you get a better picture of where miners are at and aslo why specs haven't a hope for a while unless very high quality low costs operation.

Mate - what kind of costs are you talking about? Input costs of one commodity on another (eg: sulphur's impact on nickel) where inputs are tracking in USD and production in AUD (cost rise if the USD strong) and then sales in USD (net gain if the USD strong) or local production expenses (eg: costs of oil/gas, lube and labor)? Just to clarify what you're getting at.

This is the problem with USD trading at the moment - so much manipulation at play that it's tracking out of whack. The US treasury's Exchange Stabilization Fund (whose mandate is to smooth out currency bumps) has been working overtime, as one factor among others, selling Billions of Euros and buying dollars to try and keep the USD strong.

There's an upward squeeze on costs at the moment with goldies (this was discussed in some detail during the NCM meeting this week) but on the flipside, the softening AUD has meant insulation from a softening POG. Net gains there. Equities in this instance have led the commodity down, although now it appears with the recent correction in the last week it may be around the other way.

Anyway, my 2c take:

There's no stable algorithmic relationship between USD, commodities and commodity equities. Either of the three variables here can lead or lag and there is no set pattern at play historically. Generally it's true to say that the POG, for example, acts as a hedge against a softening USD and that a strong USD signals a fall. But the USD and POG can and do both trend upward at the same time. Better, IMO, to track the item you're trading.

If you feel like watching two american ex hedge fund guys sitting on the back porch in their shorts chatting about the POG vs the USD and how equities lead/lag them, here's something out yesterday. One specifically talks about a trading mistake he made trying to trade commodity prices contrarian to the USD:

http://www.wallstreetwindow.com/content/node/7559

 

[Kauri]

Tonight the skip is falling as news/rumours.. that KDB may buy Leemings... (Leeming up 8%odd pre-open.. dow futures getting a ride too..).. how can you get on the right side of the many diverse factors that drive FX... int. rates/commodes are only a part of it.. I thunk..
Cheers
...........Kauri

 

[Spaghetti]

Hi Paladin. Cash cost for production but also never mentioned actually ability to finance and also higher financing costs.

The higher interest rates for eg will increase AUD value but also would increase expense for miners. So financing on higher rates for USD has double whammy, higher AUd and higher repayment rates, ouch.

NCM is a lower cost miner, has some copper credits, but if you look at others costs have gone through the roof. Cash costs were about $500 oz average for eg and then we saw companies like MON and NGF report costs closer to $1,000 per ounce. Seeing POG never actually reached this, ok maybe for nano second, and even though only ramp up stage, not supportable until POG can cover increases in costs PLUS cover the inititial capital costs, They have also exploded.

So yes cost of production basically lol.

 

[Paladin]

Hi Paladin. Cash cost for production but also never mentioned actually ability to finance and also higher financing costs.

The higher interest rates for eg will increase AUD value but also would increase expense for miners. So financing on higher rates for USD has double whammy, higher AUd and higher repayment rates, ouch.

NCM is a lower cost miner, has some copper credits, but if you look at others costs have gone through the roof. Cash costs were about $500 oz average for eg and then we saw companies like MON and NGF report costs closer to $1,000 per ounce. Seeing POG never actually reached this, ok maybe for nano second, and even though only ramp up stage, not supportable until POG can cover increases in costs PLUS cover the inititial capital costs, They have also exploded.

So yes cost of production basically lol.

Hey Mate. Cheers for that. Yeah - I hold NCM and it's nice to see that green this week. Was impressed with their meeting on Monday, and especially them being so frank about ongoing failure to meet guidance at Telfer. I'd hate to be working at Telfer in a managerial capacity! Sounds like they're quite dissapointed with how it's going there and copper isn't saving it at the moment - lots of focus there from the head honchos and it will be interesting to see how they manage that if they can't get the efficiencies they're hoping for there. Not sure if you caught the meeting, but in the Q&A they mentioned they've seen quite a spike in approaches from juniors to JV them - as a result of the rising costs/softening POG squeeze. As a lowest quartile producer in terms of costs I much prefer them to LGL. Plus I like their current gearing at 8% even if they do creep back to the stated 15-20 to fund their PNG diversification.

Even with cashed up producers some are doing really badly of course. If you factor in SBM's losses to their cash costs too as an example I think they're costing something like $1600 an oz at the moment (being cash costs + costs of sales adjustments + total opex losses/oz throughput). Ouch! Unless they get good results out of Gwalia in the next month they're stuffed. So I'm not sure if you factor that in too, but it seems a worthwhile metric to apply in adition to your note about gearing. Opex burn aside, do you formally add interest charges pro rata for oz sold to arrive at a figure, or is it more something you note in the back of your head?

Your note about ability to raise finance in addition to finance costs is particularly germane I think. A number of promising juniors with great JORC resources like MCO who are on the brink of production but may run out of cash before they see revenue in (relying as they are on their options being exercised - but with the strike above the SP, not much chance of that ATM) may well be hurt badly by the sentiment around capital raising at the moment.

On the teeny chance the POG retraces all the way to $600 (which I don't think it will, but who knows at the moment) we'll definately see an armageddon amongst the juniors.

In case it's useful to mention for anyone, I've found the Mining Valuation handbook to be a wonderful resource for getting my head around the OZ resource industry vis-a-vis finance issues. http://www.moneybags.com.au/default.asp?d=0&t=1&id=2716&c=0&a=74

Thanks for those thoughts!