Currency factor

The Rubber Economist Ltd

Currency factor

The direct effects of currency movements occur when a commodity is purchased from one country in a given currency for use or resale in another country using a different currency. Any change in the value of the exchange rates of the two currencies can affect the price in the purchasing country without any change in the price in the producing country. The indirect effects derive from arbitrage activity and speculative demand, which can either be ‘commodity’ speculative or ‘foreign’ exchange speculative. The immediate impact and the long-run effect, as the quantity demanded and supplied adjusts to the price change, must also be distinguished. In the short-term, commodity prices could increase or decrease depending on the movement in currencies. The change in prices is a short-term phenomenon and has a nominal effect on the commodity price, i.e. no immediate effect on the demand and supply of the commodity. In a ‘perfect world’, if prices vary among markets when converted to the same currency, arbitrage is likely to take place. However, in the longer term the change in currency may result in an increase in demand and/or supply of that commodity. A rise in the commodity price may persuade manufacturers to substitute a competitive commodity, while a decrease may favor its use over the competitive material. At the same time, price movements may influence the producers to increase or decrease exports/production of the commodity concerned.

A factor which has influenced high rubber prices in recent years is a relatively lower amount of output in relation to consumption. Exports have been relatively low as a result of bad weather and the weak value of the US dollar relative to currencies in the producing countries. This is particularly true for the strength of the Thai Baht as compared to the US dollar. The correlation coefficient of the exchange rate of SDR, representing an average of currencies in general to US dollar and SMR 20 prices is also quite high, i.e. 0.62. This means the weakening in the US dollar generally means higher prices of NR and vice versa. This as can be seen in the graph below, the high prices in 1995 are associated with the weakened dollar and vice versa during the latter part of the 1990s. The rise in price thereafter was again influenced by the weakening dollar.

Currency movements and NR prices, 1990-2007

Home (New)