Index of Commodity Prices Rises Anew

Australia’s index of commodity prices rose for the fourth consecutive month in February according to a report by the Reserve Bank of Australia (RBA).

The index increased by 2.3 per cent last month, continuing a surge that saw a previous increase of 2.4 per cent in January. This left commodity prices up by 7.5 per cent from the recent low in October, but 15.2 per cent lower than the all-time high seen in July 2011. Historically, the current figures are still three times higher than late 2003 numbers at the beginning of the commodity price boom.

February’s increase was mainly due to the rise in the price of iron ore, according to the figures from the RBA. At the same time, the prices of coking coal, crude oil and base metals also rose, while prices of rural commodities dipped during the same period.

Over the past year, meanwhile, commodity prices fell by 7.2 per cent in special drawing right (SDR) terms, or 4.8 per cent in Australian dollar terms. Lower prices of coking coal and thermal coal caused the downward movement, said the RBA.

The Index Explained

So how does the recent surge in commodity prices affect the foreign exchange market? In Australia, commodity prices are closely correlated to changes in the AUD.

The reason for this tight correlation is that Australia is a major exporter of commodities, especially iron, coal, and tin. Thus, any movement in the price of commodities would help forex investors predict future movements in the forex market.

In other words, the recent rise in the index could signal a further increase in the value of the Australian dollar. Whether or not the Reserve Bank would decide to temper the dollar’s rising value by intervening is currently unlikely though. RBA Governor Glenn Stevens recently said that they have no plans of intervening at the moment.

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