Currency ETFs Serving as Commodity Proxies

Canada, Australia dollar funds FXA, FXC may be positioned well for China growth.

Australia and Canada share a host of commonalities: They are big, kind of empty in the middle and Commonwealth members. Of course, they have differences; Canada has moose, Australia has wombats.  

For investors, another similarity may be critical: Their currencies tend to mimic commodity prices. 

The Invesco CurrencyShares Australian Dollar Trust (FXA) and the Invesco CurrencyShares Canadian Dollar Trust (FXC) respectively track the Australian dollar, or A$, and Canadian dollar, or C$, against the U.S. dollar, the world’s reserve currency.  

Both have a wealth of natural resources, and their small populations and geographical location make them leading commodity-exporting nations. The A$ and C$ tend to move higher and lower with commodity prices as they determine tax and corporate revenues.  

Serving China and the US 

Australia is a top producer and exporter of coal, iron ore (the primary ingredient in steel), gold, lithium, uranium and bauxite (the primary ingredient in aluminum). Australia’s climate makes it a leading producer of agricultural products including sugar cane and barley, as well as meat, wheat and wool. Beef and wheat are Australia’s top agricultural exports.  

Australia’s proximity to China makes it a supermarket for the world’s most populous country and second-leading economy after the U.S. China is the top raw material consumer and is Australia’s leading trading partner.  

Canada’s commodity production includes crude oil, gold, wheat, aluminum and timber. Canada is the world’s fifth-leading petroleum and gold producer, and lumber exports are second only to China.  

Canada’s long border with the United States makes the U.S. its leading trading partner. 

A$, C$ Peaked During 2011 Commodity Rally 

In 2011, commodity prices peaked during the secular bull market in raw materials; the A$ and C$ peaked against the U.S. dollar.  

Source: Barchart 

The chart highlights the Australian dollar’s move to $1.10787 against the U.S. dollar in July 2011 during the last commodity bull market.  

Source: Barchart 

At the same time, the Canadian dollar peaked at $1.06164 against the U.S. currency. In 2011, the rise in raw material prices supported gains in the A$ and C$ against the U.S. dollar.  

Meanwhile, after spiking lower in early 2020 as the global pandemic gripped markets across all asset classes, the A$ and C$ have made higher lows against the U.S. greenback and are crawling higher in early 2023.  

FXA and FXC: Commodity Proxies 

The U.S. Federal Reserve and the European Central Bank have a 2% target rate for inflation. In 2022 and early 2023, we had and have far to go to reach that target.  

Last week, the Fed increased the fed funds rate 25 basis points to a midpoint of 4.625%, and the ECB moved its interest rate 50 basis points higher to 2.5%. The Bank of England raised short-term rates by 50 points to 4%.  

Central banks have tightened monetary policy to address inflation, which impacts the economies’ demand side. However, the ongoing war in Ukraine and the bifurcation of the world’s nuclear powers have created supply-side issues that could prove beyond the central bank’s monetary policy reach.  

Food and energy commodities have become weapons in Russia’s aggression against countries supporting Ukraine. Russia and Ukraine are Europe’s breadbasket, and the Black Sea ports are a critical logistical export hub. Russia is also the most influential nonmember of OPEC, the international cartel and Western Europe’s leading natural gas supplier.  

Moreover, China is the world’s leading commodity consumer.  

The Chinese-Russian “no-limits” alliance has bifurcated the world’s nuclear powers. Markets reflect the economic and geopolitical landscapes, and commodities are global assets. The current environment creates fundamental distortions, leading to shortages and price volatility.  

China’s 2022 COVID-19 lockdowns weighed on raw material prices and impeded trade with Australia. As China emerges from the protocols, commodity demand will likely increase, supporting prices and the A$ and C$, which are raw material proxies.  

The most direct route for a risk position in the commodity currencies against the U.S. dollar is via the over-the-counter foreign exchange market or the futures contracts. The two ETFs provide an alternative: 

• At $68.00 per share on Feb. 6, FXA had $84.04 million in assets under management. The ETF trades an average of 11,763 shares daily and charges a 0.40% expense ratio.  
• At $72.68 per share on Feb. 6, FXC had $95.36 million in assets under management. The ETF trades an average of 35,018 shares daily and charges a 0.40% expense ratio.  

FXA and FXC do an excellent job tracking the price action in the A$ and C$ moves against the U.S. dollar: 

• The Australian versus U.S. dollar exchange rate moved from $0.61803 in October 2022 to the most recent high of $0.71578 in February 2023, a 15.8% rise. Over the same period, FXA moved from $61.33 to $70.72 per share, or 15.3%.  
• The Canadian versus U.S. dollar exchange rate moved from $0.71550 in October 2022 to the most recent high of $0.75398 in February 2023, a 5.38% rise. Over the same period, FXC moved from $70.03 to $73.65 per share, or 5.17%.  

One of the drawbacks of the ETFs versus the over-the-counter forex market is that the OTC market trades around the clock, while the ETFs are only available during the hours the U.S. stock market operates.