The dramatic decline in the prices of a number of commodities over the last 16 months must have a common factor. One variable that seems to be quite important is the exchange rate.
Dollar prices of five commodities along with dollar cost of one euro. Source: Financial Visualizations.
Here’s a graph over a longer period of the dollar price of oil, the dollar price of copper, and the dollar price of a weighted average of other countries’ currencies with weights based on the volume of trade between the U.S. and each country. The graph is plotted on a logarithmic basis, so for small changes the height of each series corresponds to the percent difference between the price at the indicated date and the price at the end of June 2014 (see my primer on the use of logarithms in economics if you’re curious about those statements or why it might be helpful to plot series this way). The plunge down in all three measures since June 2014 that was highlighted in the first set of graphs is seen to be a broader pattern of striking positive co-movements among these variables.
Price of West Texas Intermediate (black), copper (green), and inverse of trade-weighted value of the dollar (blue), end of week values April 20, 2007 to November 20, 2015. Graph plots 100 times the difference between the natural logarithm at the indicated date and the natural logarithm on June 27, 2014. A value for the blue series below zero means that the dollar was worth more on that date than it had been on June 27, 2014.
One would expect that when the dollar price of other countries’ currencies falls, so would the dollar price of internationally traded commodities. But it is a mistake to say that the exchange rate is the cause of the change in commodity prices. The reason is that exchange rates and commodity prices are jointly determined as the outcome of other forces. Depending on what those other forces are, one might see stronger or weaker co-movement between commodity prices and exchange rates.
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