Forex Investment and Currency Trading

So where are the positives for the commodity currencies amidst the cyclical slowdown? May of the medium-term themes in the global economy remain constructive. The powerful growth in China, India and the rest of the Emerging Markets is relatively commodity intensive (compared to that in the developed economies). It requires more “stuff”. To the extent that the outlook for the EM economies remains favourable medium term – particularly in the context of Asia – any set back in commodity prices and currencies may eventually be reversed. Indeed, even the near-term outlook for commodities is not uniformly bearish for commodities. In the oil market, prices may stabilize close to current levels given relatively tight underlying demand-supply conditions and the ability of producers to scale back production in the context of any demand shortfall. Continued infrastructure investment across the emerging market context may be supportive for the price or iron ore (aiding BRL, AUD) despite weakness in demand from developed economies. Perhaps most vulnerable in any sustained cyclical downturn would be copper (negative for CLP and ZMK) given very elevated prices. All of this creates more of a relative value context for commodity currencies, rather than a uniform late 1990s “sell everything” outlook.

There is still a lot of stored up good news for some of the commodity producers given the powerful surge in commodity prices from start-2000 onwards even if commodity producers do retreat from their 2007/08 peaks. As an example, the powerful surge in spot iron ore prices is just being reflected in higher contract prices for the major producers – exporters are likely to see continued terms of trade improvements (and more favourable trade positions) going forward. The progressive supply response to higher commodity prices should also be supportive for economic activity. Arguably this leaves the “stuff” economies much better placed than the service-orientated, asset bubble-inflated economies in the developed world (such as the US, UK and Spain). Over time, FX markets are likely to reflect that.