The exchange rate plays a crucial role in the dynamics of the global economy, directly influencing commodity prices and their competitiveness on the international market. 

For producers and consumers, understanding how these fluctuations impact different sectors is essential for strategic decisions and more effective risk management. In this article, we explore the main factors behind exchange rate variations and their effects on foreign trade and the commodities market. 

You will also understand the role of risk management in protecting yourself from volatility. Happy reading! 

Read also: 

• Foreign exchange: a journey to global investments 

Why does the exchange rate change daily? 

The exchange rate represents the value of one currency in relation to another and is constantly fluctuating. These fluctuations occur because the exchange rate is defined mainly by the supply and demand of currencies on the financial market. Various economic, political and social factors influence this balance. Below, we highlight two of the most relevant: 

1. Trade balance 

The trade balance reflects the difference between a country’s exports and imports and directly affects the flow of currency. 

• Trade surplus (exports > imports):
  When a country exports more than it imports, there is an increase in the inflow of foreign currency and a greater demand for the local currency (needed to pay for the exported products). This tends to increase the value of the national currency.
• Trade deficit (imports > exports): 
  If the country imports more than it exports, the need for foreign currency increases, reducing the demand for the local currency, which can lead to its devaluation. 

2. Interest rates and monetary policy 

The interest rates set by the central bank are an important tool of monetary policy and have a direct impact on the value of the currency. 

• High interest rates:
  They attract foreign investors in search of higher returns, increasing the flow of capital into the country. This increases demand for the local currency and tends to make it more valuable.
• Low interest rates: 
  They can reduce the attractiveness for international investors, decreasing the flow of capital and the demand for the local currency, which contributes to its devaluation. 
• Market expectations: 
  Monetary policy decisions (such as interest rate adjustments or stimulus measures) affect the expectations of economic agents, influencing the currency rate in advance. 

3. Inflation 

Countries with high inflation tend to have a weaker currency, as purchasing power falls. This can lead to currency devaluation, making imports more expensive but exports more competitive. 

4. Political scenario and economic stability 

Markets tend to favor the currencies of politically stable countries with predictable economies. Crises, conflicts and uncertainties can lead to currency devaluation, while a secure environment tends to strengthen it. 

Read also: 

• Understand monetary policies and the weight of Asian rates on the foreign exchange market 

How does the exchange rate impact the commodities market? 

Commodities such as oil, soybeans, corn and coffee are traded globally, and their prices are usually quoted in US dollars. Exchange rate variations therefore significantly affect their prices and competitiveness. Here’s how: 

1. impact on exports and imports 

• Devalued local currency: the country’s commodities become cheaper for international buyers, boosting exports. This can benefit producers, increasing revenues and making products more competitive. 
• Appreciated local currency: exporters lose competitiveness as their products become more expensive on the foreign market. Importers, on the other hand, can benefit from the reduced costs of foreign inputs and products.

2. Changes in production costs 

Exchange rate fluctuations also have an impact on operating costs, especially when inputs, machinery and fertilizers are imported. If the local currency loses value, production costs rise, reducing profit margins. 

3. Adjustment in commodity prices 

• When the dollar strengthens, commodity prices in dollars tend to fall, as international buyers lose purchasing power; 
• When the dollar weakens, the price of commodities tends to rise, as they become more accessible to importers. 

Read also: 

• What influence does the dollar have on agribusiness and how can you prevent losses? 

What is the role of risk management in this context? 

Faced with exchange rate volatility, producers and companies in the commodities sector need to adopt risk management tools to mitigate negative impacts. These tools include: 

1. Currency hedging
   Companies exposed to international transactions are subject to exchange rate volatility, which can compromise profit margins and revenue predictability. To mitigate these risks, financial instruments such as futures contracts, forward contracts (NDFs) and currency options are widely used.  

They allow exchange rates to be “locked in” for future dates, ensuring greater financial stability and predictability in cash flow. In addition, the strategic use of currency hedges helps to protect investments, improve budget planning and maintain competitiveness in foreign markets. 

2. Market diversification
   Exporters who distribute their sales between different countries are able to dilute the impact of fluctuations in a single currency. 

By operating in multiple regions and trading in different currencies (such as the dollar, euro, yuan or real), the company reduces its vulnerability to localized economic shocks, political variations or regulatory changes. This geographical diversification can also open up new business opportunities and increase the operation’s resilience to global volatility. 

3. Continuous monitoring of the economic scenario
   The exchange rate is influenced by a series of interconnected factors, such as interest rates, inflation, trade balance, central bank decisions and political instability. Monitoring these indicators systematically allows companies to anticipate market movements and adjust their strategies proactively.  

Scenario analysis, the use of economic intelligence tools and specialized consultancy can be valuable allies in the active management of exchange rate risk. 

4. Negotiating contracts in local currencies 
   Whenever possible, establishing commercial contracts in the local currency of the customer or supplier can protect both parties from exchange rate fluctuations, especially in emerging markets with high volatility.  

This practice reduces uncertainty, simplifies cash management and can strengthen business relationships. However, this strategy requires a careful analysis of risks, the liquidity of the local currency and the regulatory environment, since not all currencies have deep markets or the necessary stability. 

Read also: 

• Understand what currency hedging is and how it works 

Protect your business from currency fluctuations 

Exchange rate volatility plays a significant role in defining the profitability and competitiveness of commodities. In other words, it requires agile risk management strategies. At Hedgepoint, we understand these challenges and offer hedging products for the entire commodities chain. 

Want to understand all market movements and make more assertive decisions? Subscribe to our newsletter and receive exclusive analysis on foreign exchange, commodities and global trends directly in your e-mail! 

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This document has been prepared by Hedgepoint Global Markets LLC and its affiliates (“HPGM”) solely for informational and instructional purposes and is not intended to establish obligations or commitments to third parties, nor is it intended to promote an offer, or the solicitation of an offer, to buy or sell any securities, futures, options, currencies and swaps or investment products. Hedgepoint Commodities LLC (“HPC”), a wholly owned entity of HPGM, is an Introducing Broker and a registered member of the National Futures Association. Trading futures, options, currencies and swaps involves significant risk of loss and may not be suitable for all investors. Past performance is not necessarily indicative of future results. Hedgepoint clients should rely on their own independent judgment and that of external advisors before entering into any transaction that is introduced by the company. HPGM and its associates expressly disclaim any liability for any use of the information contained herein that results directly or indirectly in damages of any kind. In the event of questions not resolved by our customer service team ([email protected]), please contact our internal ombudsman channel ([email protected] ) or 0800-878 8408/[email protected] (for customers in Brazil only).