Commodities have enjoyed unprecedented gains over the past few months, as WTI crude oil futures hit an all-time high of $111.80/bbl while gold futures on the NYMEX surged to a record of $1,033.90/oz early in the week. However, commodity prices have plunged across the board in recent days, as traders liquidate profitable positions. The moves have made a huge impact on the forex markets, as the Australian dollar and Canadian dollars have tumbled over 4 percent this week, while the New Zealand dollar has given up over 3 percent. Will these massive declines continue?

First, let’s consider that the primary source of growth for the Australian, New Zealand, and Canadian economies has been demand for commodities like gold, oil, wheat, zinc, dairy and beef among a long list of others. Many of these goods were destined for booming Asian economies like China, whose growth rates have breached double digit gains. Meanwhile, Canada’s primary trading partner – the US – purchases over 80 percent of the nation’s total exports, according to Industry Canada. However, the strength of the export sector may soon lose its momentum as the US teeters on the brink of recession while global growth slows. While prices for raw materials may act as a temporary crutch, prices have begun to turn. Furthermore, the Baltic Exchange Dry Index, which is a strong leading indicator for global inflationary pressures and commodity demand, has recently started to plummet.

There are strong correlations to keep in mind when it comes to the commodity dollars. The New Zealand dollar has a very high correlation with the Australian dollar, and the Australian dollar shows strong links with gold prices. Meanwhile, the Canadian dollar is well known for its correlation with oil prices (though the strength of this relationship can vary). However, did you know that gold and oil are correlated with the BDI? The relationship between the Baltic Dry Index and these commodities can be seen in the chart below, courtesy of InvestmentTools.com. It is clear that BDI tends to be a leading indicator for shifts in price action for gold and oil, and over the past week, we have already seen sharp declines. The BDI measures the cost of shipping different commodities around the world and if demand to ship is strong, the price for shipping these raw materials increases. On the other hand, if demand is weakening, the price falls. The recent drop in the BDI is our first indication that commodity hungry countries like China and India are no longer immune to the slowdown in the US.