FYI | Jul 24 2008
By Chris Shaw
Since July 3rd the CRB Index of Commodity Prices has fallen 11% to be back at levels last seen in March of this year, though as TD Securities notes this is only one indicator commodity prices are turning lower. The group points out there’s other evidence abounds, from a general view the global economy continues to slow to the fact the Baltic Dry Freight Index has fallen for seven successive days and is now 24% below its peak in May.
Toss in the unfavourable developments for commodity market fundamentals of reduced demand as economic activity slows across the globe and increased production from major producers in metal and hard commodity markets and from better weather conditions in soft commodity markets and it adds up to downside price pressure and the likelihood of further price weakness in the group’s view.
An example is the oil market, where prices have fallen sharply from recent peak highs as demand falters somewhat, a trend the group’s global strategist Stephen Koukoulas suggests may spread to other commodity markets as growth in the global economy struggles to reach 1.5% this year, especially with central banks in general considering tightening monetary policy to deal with inflationary pressures.
The plus side of such an environment according to Koukoulas is a turn lower in the commodities cycle could see global inflationary pressures dissipate quite quickly, to the extent a number of economies may be showing flat or even negative headline inflation by the end of the year.
In Koukoulas’s view this would offer scope for those central banks considering tightening rates to hold off on such action, while also freeing up others such as the Reserve Bank of Australia and the Bank of England to consider cutting rates.
While this should offer a boost to their respective economies it would come at a cost to their currencies, Koukoulas suggesting the commodity currencies in particular now look very exposed to such an outcome. As a result he is cautious on the outlook for the Australian and Canadian dollars, seeing them as particularly at risk of a sharp downturn if commodity prices continue to weaken as they have in recent sessions.
