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Minimizing Risk

Commodities vs commodity currencies

RESEARCH

Investors who wish to gain exposure to commodities can do so directly through futures, options and other derivatives; or indirectly, and perhaps unintentionally, through the currencies of commodity exporting nations. The Australian dollar (AUD), Canadian dollar (CAD), Brazilian real (BRL), Mexican peso (MXN), Russian ruble (RUB) and the South African rand (ZAR) demonstrate positive and, at times, reasonably strong correlations to a large basket of commodities (Fig.1).

These correlations offer opportunities for investors who have exposure to either currencies or commodities. For example, one could take a position in a commodity and potentially reduce portfolio risk by taking an opposite position in a positivelycorrelated currency (Fig.2–5). What makes this even more interesting is the chasm between the carry in currencies and commodities. Some currencies, notably those of emerging markets, exhibit positive interest rate carry versus the US dollar (USD) and other developed market currencies. By contrast, certain commodities exhibit negative carry when they are in contango (when prices in the future are above current levels), a situation that persists much of the time. Essentially, holders of emerging market currencies usually receive an interest rate premium while holders of commodities most often pay storage, insurance, interest and incidental costs.

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About The Hedge Fund Journal

Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.