MNI INTERVIEW: Commodity Currencies Hit By Climate Risk

Commodity-linked currencies from Mexico to Australia have begun to tend to depreciate when perceptions of climate change risk rise, and their exchange rates are becoming less linked to the prices of their main exports, a shift that may continue as nations move to curb global warming, Norges Bank economist Vegard Larsen told MNI.

There is a significant statistical relationship between depreciations of commodity currencies and increased news coverage of how climate change may disrupt the energy industry and beyond, Larsen said in an interview. Currencies like the Canadian dollar and South Africa's rand are also showing less of a connection between commodity prices and their exchange rates, he said.

"For all these countries, when climate risk increases, then the exchange rate for that country weakens," he said.

"Some of these expectations I think are already going to baked into the mix," he said when asked if the pressures will keep rising. His research also covered Brazil, Malaysia, Russia and his own country of Norway.

"Especially after the oil price fall in 2014 and the oil price started to increase again, we didn't see the expected appreciation in the Norwegian krone," he said. "Maybe there is a switch to maybe you have to watch more for these kind of climate risks."

CHANGING TRADING PATTERNS

The findings could disrupt the ground rules of economies like Canada where governments rely heavily on revenue from exported natural resource taxes and the central bank sees the currency as a shock absorber that curbs swings in employment and inflation. Larsen tracked the volume of news in different nations on climate risk from 2002-2019 and said his findings hold across the entire currency group he studied. But he cautioned that it is hard to predict where these trading patterns are going from here as governments and corporations take more action to stem global warming.

"What we what we're measuring is kind of a risk, you don't know how that risk is going to materialize, right. You can be very kind of lucky and come out on the other side of this transition period being very strong," said Larsen, who presents findings at a Federal Reserve-hosted conference on Sept. 29.

Most countries experienced an increase in climate risk around the Paris agreement and the implementation of the EU Emissions Trading System, according to Larsen's paper.