Impact of a Commodity Supercycle on the AUD and CAD

The Australian Dollar (AUD) and the Canadian Dollar (CAD) have not had a good run in 2024. The AUD/USD was down 7.25% YTD by December 18, while the CAD/USD had fallen 7.48%. The weakness in the AUD has been due to the Reserve Bank of Australia (RBA) deciding to hold its cash rate steady at 4.35% for the ninth consecutive time at its December 2024 meeting. The stumbling Chinese economy has also hurt the currency, which benefits from commodity imports from China. The CAD, on the other hand, has remained weak due to inflation continuing above the Bank of Canada’s (BoC) target of 2%, the central bank’s dovish stance and lower commodity prices.

The good news, however, is that a correction could be on the cards, with several analysts stating that we could be amid a commodity supercycle in 2024. Given that such supercycles tend to last for several years, the Australian and Canadian dollars could be significant beneficiaries. Want to know why and how this impacts your forex trading strategy? Read on. But first, let’s understand what a commodity supercycle means.

What is a Commodity Supercycle?

Bank of America’s (BofA) analysts had stated in September 2024 that commodities have been undervalued for some time now but a “secular bull run” is starting. This signals the beginning of a supercycle. The BoC defines a commodity supercycle as an “extended period during which commodity prices are well above or below their long-run trend.” Such a bull run could last anywhere from 5 years to a decade.

Signs of an impending supercycle have been visible for a while, with commodities generating returns of over 116% since 2020, compared to the loss of 39% in US 30-year Treasury bonds. Commodity indices have also seen annualised returns of 10%-14% despite persisting inflation and the Fed’s dovish stance.

The last time such a supercycle occurred was in 2002, when China entered a prolonged period of economic expansion. The supercycle was driven by rapid urbanisation and industrialisation in China, along with the acceptance of the country into the World Trade Organization. China’s economic growth led to increased demand for industrial metals, including copper, iron ore and aluminium, to support the manufacturing sector and infrastructure development. This fuelled a period of extended price boom in the commodities markets worldwide. Mining companies, oil producers and commodity-based economies benefited from the resultant spike in commodity prices.

When any economy grows, its demand for commodities rises. When demand reaches a level where it significantly exceeds supply, prices rise. Most often, commodity producers don’t immediately react to this imbalance and price increases, expecting both to be short-lived. This, then, leads to the gap between supply and demand widening, keeping the price pressure up.

This time around, the persisting geopolitical tensions in the Middle East, the push for a green transition to meet the net-zero targets and expectations of increasing trade tensions under the second Trump term are potentially driving the supercycle. Another factor to consider is the rising middle class, with its increasing demand for food, housing, transportation, clothing and other goods.

So, what do changes in the commodity markets have to do with your forex trading strategy? Well, Australia and Canada are commodity-dependent economies, with exports accounting for 25.81% of the former’s GDP and 30% of the latter.

Australia and Canada are Commodity-Dependent Economies

A substantial portion of the economic output and trade of both nations is derived from the extraction and export of natural resources like minerals, fuels and agricultural products. Australia is a major exporter of minerals like iron ore, coal, and gold, along with agricultural products like wheat and beef. Similarly, Canada is a leading producer and exporter of minerals like gold, zinc, copper, and nickel, along with oil and gas. 

Therefore, the natural resource sector plays a vital role in both economies, contributing significantly to their GDP, employment and forex earnings. However, this also means that fluctuations in global commodity prices can impact their economic health and terms of trade. So, when a commodity supercycle occurs, we can expect positive impacts on Australia and Canada, such as:

• Boost to Revenue and Growth: Commodity-driven economies experience increased revenue from exports, leading to higher government revenue, increased foreign exchange reserves, and potentially higher economic growth.
• Increased Investment: Higher commodity prices incentivise investment in the extraction and production of commodities, leading to infrastructure development and job creation.
• Improved Terms of Trade: Commodity-driven economies may experience improved terms of trade during a supercycle, meaning they can purchase more imports with the same amount of commodity exports.

When both domestic and foreign investments in the commodities sectors rise, it supports the domestic currency. So, if a supercycle does take shape, we can expect the AUD and CAD to gain strength. However, before you go ahead and revise your forex trading strategy, it is important to understand that the interplay of multiple factors impacts currency values. Therefore, while keeping an eye on the commodities market, make sure to do your fundamental and technical analysis before making trading decisions.

To Sum Up

• The AUD and CAD have been weakening but the future might be bright.
• Analysts expect a commodity supercycle, which could bolster both currencies.
• A supercycle is a prolonged period of high commodity prices and could last for several years.
• The last commodity supercycle was driven by China’s economic growth, which raised demand for industrial commodities.
• Australia and Canada are commodity-dependent economies.
• A commodity supercycle will benefit both nations because a significant percentage of their GDPs are accounted for by commodities.

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