Great Graphic: The Euro and Commodity Prices

This Great Graphic was constructed on Bloomberg.  It shows the CRB commodity index (white line) and the euro (yellow line).   The fit here looks better than what many consider to be commodity currencies, like the Australian and Canadian dollar.  

The likely explanation is not going to be a causal one either, as one might think of for the commodity currencies, via a negative terms of trade shock. Instead one channel of contagion is the potential policy response to falling commodity prices.  This will heighten the risk of deflation in euro area, and would push the ECB into more aggressive easing.   

Another channel may be through growth.  Falling commodity prices may reflect slower growth. The OECD recently revised down its forecasts for world growth.   Given the debt burden, Europe needs faster world growth.  If faster world growth is not materializing, a weaker euro secures for the EMU a greater share of what growth is taking place.

Yet, the optics may be confusing. This lower chart shows the same two time series indexed to show the change over the past decade.  Two things seem evident.  First, the euro-dollar exchange rate is considerably less volatile than this basket of commodity prices.  Some time the two move in parallel direction, but not always.  In fact, as the chart shows, the euro has been generally appreciating since 2012, while the CRB has been trending lower.