FX and commodity prices, more tightly linked

The prospects for commodity prices are crucial to EMs not only because they tend to have a higher concentration of commodity producers, but also are affected by common demand side factors for their other major export-manufactured goods.

When commodity prices have declined across the board EM FX has also underperformed substantially. The Barclays GEMS index was down roughly 1% on average during such weeks over the past 1y, whereas the average decline was 0.06% during weeks when broad. 

The sensitivity of commodity currencies (both G10 and EM) to commodity price moves has also increased in recent times. It is found that by and large most of these correlations have increased, implying that commodity price moves have become more important for commodity-linked FX than in the past. 

"Indeed, looking across the broader currency space, it is found that a lot of the movements in REERs over the past year are explained by the commodity terms of trade", says Barclays.

Although commodity currencies have cheapened recently, this has come from previously extreme expensive levels. The current valuation levels for commodity currencies are not particularly cheap. 

"It is found that current valuations for the likes of AUD, NZD, RUB, and BRL remain expensive despite recent declines", added Barclays.