Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Commodity Currencies Are Beating Inflation Hedges
Transcript
- Lucas: So gold's up six percent in the last five days. Silver up nine. But there's a quieter inflation hedge that's actually beating both of them year-to-date, and most retail investors aren't even looking at it. Luna: I'm guessing you're not about to say TIPS. Lucas: Definitely not TIPS. I'm talking about commodity-linked currencies. Specifically, the Australian dollar, the Canadian dollar, and the Norwegian krone. Luna: Currencies as an inflation hedge? That feels counterintuitive. Usually when inflation's sticky, the dollar strengthens. Lucas: Normally, yes. But this cycle is weird. The Fed paused rates at 3.65 percent on the effective rate, while the Reserve Bank of Australia and Norges Bank have kept hiking. That rate differential matters. But more importantly, these three countries are massive commodity exporters—Australia with iron ore and liquefied natural gas, Canada with oil and lumber, Norway with oil and gas. When commodity prices stay elevated, their export revenues surge, and that flows through to currency demand. Luna: So the currencies are acting as a pass-through for real asset prices. How much have they actually moved? Lucas: The Australian dollar is up about 8.2 percent against the US dollar year-to-date. The Canadian dollar is up around 5.5 percent. The Norwegian krone has gained nearly 10 percent. Compare that to gold, which is up roughly 6.2 percent over the same period, and the S&P 500, which is up about 4.5 percent. And unlike gold, these currencies also pay a yield—the Australian dollar cash rate is 4.35 percent, so you're getting carry on top of appreciation. Luna: Right, so you're essentially getting a yield plus inflation hedge combination. But isn't currency exposure risky? I mean, the Australian dollar dropped 12 percent in 2020. Lucas: Absolutely, currencies are volatile. But the key here is correlation. In a period where sticky inflation is driven by supply-side constraints—energy, metals, food—commodity currencies tend to rally because their terms of trade improve. Meanwhile, traditional inflation hedges like long-duration bonds get crushed when the Fed stays hawkish. And even gold, which has done well this year, doesn't generate income. A currency ETF like the Invesco CurrencyShares Australian Dollar Trust gives you exposure to the Aussie dollar with a yield of around 4 percent. Luna: So how would an average investor actually implement this? Most people don't trade forex. Lucas: The easiest way is through listed currency ETFs. There's one for the Australian dollar, ticker symbol F-X-A. For the Canadian dollar, there's F-X-C. For the Norwegian krone, there's the WisdomTree Norway Krone ETF, though it's less liquid. You can also buy short-term sovereign bonds denominated in those currencies—like Australian government 2-year notes—which gives you both the yield and the currency exposure. But the simplest play is just to allocate 5 to 10 percent of your inflation-hedge bucket to a basket of commodity currencies, rebalancing once a quarter. Luna: And you'd want to avoid currencies from commodity importers, right? Like the Japanese yen or the Indian rupee. Lucas: Exactly. Japan imports almost all its energy and food, so when commodity prices rise, the yen tends to weaken. That's the opposite of what you want in an inflation hedge. The commodity-currency trade is really about picking the right geography. Australia, Canada, Norway—these are developed, stable economies with independent central banks and deep capital markets. It's not like betting on the Brazilian real or the Turkish lira, where political risk overwhelms the commodity story. Luna: Speaking of Norway, their sovereign wealth fund is massive. Does that provide any extra buffer? Lucas: It does. Norway's Government Pension Fund Global smooths out the volatility of oil revenue. So even if oil prices dip, the krone doesn't collapse the way it might for a country with no fiscal buffer. That makes it a more stable commodity-currency play. And right now, the krone is still undervalued on a purchasing power parity basis—meaning it has room to appreciate further. Luna: One thing I want to push back on: aren't we just chasing hot flows? Commodity currencies have had a great six months, but if commodity prices roll over, you could get hammered. Lucas: That's a fair point. The trade works as long as the commodity super-cycle thesis holds. But here's the thing—structural demand from the energy transition, AI data center buildout, and re-shoring is creating persistent demand for copper, rare earths, and energy. That's not a six-month story. That's a decade-long trend. So the currency exposure is effectively a way to bet on that structural demand without having to pick individual mining stocks or futures contracts. Luna: And the Fed pause helps, because if the Fed were cutting aggressively, the dollar would weaken even more, but that's not happening. So the commodity currencies are really benefiting from both their own rate hikes and the Fed staying put. Lucas: Exactly. The interest on reserve balances is 3.65 percent, same as the effective Fed funds rate. The Fed is in a holding pattern. Meanwhile, the RBA and Norges Bank are still tightening. That rate differential is a tailwind. And as long as core PCE stays above 3 percent—it's at 2.8 percent right now—the Fed isn't going to cut. So the environment for commodity currencies looks favorable for the rest of 2026. Luna: Let's talk about the obvious counterargument: gold. Gold is up this week, and it's the classic inflation hedge. Why bother with currencies? Lucas: Gold is great as a portfolio diversifier and a tail-risk hedge. But it doesn't generate income. A currency ETF like F-X-A yields about 4 percent from the Australian cash rate. Plus, gold's rally has been driven largely by central bank buying and geopolitical uncertainty. That's a different driver than commodity demand. If you want a hedge that's directly tied to the inflation mechanism—rising input costs—commodity currencies are a purer play. Gold is more of a store of value against monetary debasement. Luna: So you could own both. Gold for the tail risk, commodity currencies for the income and direct commodity exposure. Lucas: That's a smart framework. And if you look at the GDX gold miners ETF, it's up over 10 percent in the last five days—miners are levered to both gold and operational costs, so they're more volatile. But the currency ETFs are lower volatility and give you that carry. I think a 60-30-10 split between broad equities, inflation hedges, and commodity currencies makes sense for a balanced portfolio right now. Luna: Alright, let's get practical. If someone listening wants to add commodity currency exposure, what's the first step? Do they need a forex account? Lucas: No. Most major brokers—Fidelity, Schwab, Vanguard—allow you to buy the currency ETFs I mentioned just like any other stock. The Australian dollar ETF, F-X-A, has an expense ratio of 0.40 percent, so it's cheap. You could also buy the iShares MSCI Australia ETF, e w a, which gives you Australian equities in Australian dollars, so you get currency exposure plus stock exposure. But that adds equity risk. For a pure currency bet, stick with the single-currency ETFs. And remember to rebalance—if the Aussie dollar appreciates 10 percent, trim it back to your target allocation. Luna: And if you want to go the bond route? Lucas: You can buy Australian government bonds through an international broker, but the minimums are higher and the tax reporting is more complex. For most people, the ETF is the way to go. There's also the WisdomTree Dreyfus Australian Dollar Fund, but it's less liquid. Stick with F-X-A for liquidity. Luna: One risk I want to flag: currency hedging. If you buy a currency ETF, you're unhedged. So if the US dollar strengthens, you lose. But that's the point—you want the currency exposure. Lucas: Right. If you hedge the currency back to dollars, you defeat the purpose. Leave it unhedged. And accept that there will be volatility. In 2022, the Australian dollar fell 8 percent against the US dollar. But over the last three years, it's up about 5 percent annually. The carry helps smooth the ride. Luna: Speaking of the carry, I noticed the Norwegian krone has a higher yield than the Aussie dollar. Why not just go all-in on that? Lucas: The krone does have a higher policy rate—4.5 percent—but it's less liquid and more correlated to European economic conditions. Norway is a small economy. The Australian dollar is more diversified because Australia exports to China, Japan, and India. So for a core holding, I'd favor the Aussie or Canadian dollar. The krone is more of a tactical play. But if you have a strong view on European energy demand, it could be a nice satellite position. Luna: Let's zoom out. How does this fit into the broader inflation narrative? The CPI came in at 334.0 for May, up from 332.41. Core CPI is 336.1. Inflation is still sticky. The ten-year breakeven is 2.31 percent. So the market expects inflation to moderate but stay above target. Does that support the commodity currency trade? Lucas: It does, because sticky inflation means the Fed stays on hold, which keeps the dollar range-bound. And it means global demand for commodities stays elevated as economies adjust to higher input costs. The breakeven rate of 2.31 percent is actually below current inflation, so the market expects inflation to fall. But if that doesn't happen—if inflation stays closer to 3 percent—commodity currencies could rally further as investors realize the Fed won't cut and the dollar will weaken on a purchasing-power basis. Luna: So the trade is essentially a bet that inflation remains structurally higher than pre-2020 levels, but not hyperinflation. Lucas: Exactly. And that's a very plausible scenario given the energy transition, AI infrastructure buildout, and deglobalization. All of those are commodity-intensive. The commodity currency trade is a way to express that view without taking on the idiosyncratic risk of a single stock or sector. Luna: I want to ask about the Canadian dollar specifically. Canada is a major oil exporter, but oil prices have been range-bound. Why has the loonie done well? Lucas: Because it's not just oil. Canada also exports lumber, potash, and uranium. And the Bank of Canada has kept rates at 4.75 percent, which attracts carry. Also, the US and Canada have deep trade ties, so US economic strength spills over into Canada. The Canadian dollar is less volatile than the Aussie dollar, which makes it a good core holding. Year-to-date, it's up about 5.5 percent, which is a solid return for a currency. Luna: So if someone wanted a one-ticket solution, what would you recommend? Lucas: A simple barbell: use the Invesco CurrencyShares Canadian Dollar Trust, ticker F-X-C, for stability, and the Australian dollar trust for higher yield and growth. Split it 50-50. That gives you exposure to two different commodity baskets—energy and metals—and two different central banks. Rebalance annually. That's it. Luna: That's surprisingly simple for an inflation hedge that most people overlook. Lucas: It is. And if today's conversation helped you think about your portfolio differently, that's the kind of thing that makes doing this show worthwhile. If it was worth a coffee to you, there's a link at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the show ad-free and focused on ideas like this. Luna: Yeah, absolutely. We put a lot of research into each episode, and listener support is what keeps it independent. So if you found the commodity currency angle useful, that's the spot. Lucas: Alright, back to the numbers. One last thing I want to mention: the Vanguard FTSE Canada Index ETF, V-C-E, gives you Canadian equities in Canadian dollars, so you get both stock and currency exposure. But again, that adds equity risk. For pure currency, stick with the trusts. And keep an eye on the Bank of Canada's next meeting in July—if they hold at 4.75 percent, the carry trade continues. Luna: And the RBA meets in August. Any chance they cut? Lucas: Unlikely. Australian inflation is running at 3.6 percent, above their target band. They'll probably hold or even hike. That's bullish for the Aussie. So the environment is supportive for at least the next quarter. Luna: Great. So to wrap up: commodity currencies are a legitimate, income-generating inflation hedge that benefits from the structural demand story. They're easy to access via ETFs. And they diversify away from gold and TIPS. Lucas: Exactly. And if you're tired of watching your cash lose value at 3.63 percent effective Fed funds rate, maybe it's time to look beyond the usual suspects. Commodity currencies aren't a silver bullet, but they're a tool most people don't have in their kit. And sometimes the best hedge is the one nobody's talking about.