Commodities Monthly: Demand Recovery vs. USD

Apart from the jitters in oil brought about by an increasingly unstable situation in Egypt, commodity market worries that may have been present in early summer have generally calmed down. Even the adverse weather that has hampered grain crops in the past few years has failed to materialise this year.

The tightening in the Chinese money market in late June eased in early July (see Monitor: Chinese credit crunch) and while the Chinese authorities are clearly now more focused on implementing structural reforms and willing to accept lower growth in the short term, it does not look like a hard landing according to our economists. Still, we are probably looking at a shift where growth will increasingly be driven by improvements in developed markets rather than by emerging markets. We see growth above consensus in both the US and the euro area in 2014 at 3.0% y/y and 1.3% y/y, respectively. For China we are also slightly more positive than the average analyst, seeing growth at 7.7% y/y for next year. Globally, our economists see growth up from 2.9% y/y this year to 3.9% in 2014 (see The Big Picture: Global growth shifts to a higher gear). On the whole, while the cyclical stance is set to improve commodities demand, growth will be dampened as a result of it being less energy and/or raw-materials intensive.

In our recent FX Trends: Trust your central banker we emphasise that the cyclical environment is set to be benign for risk assets but that Fed tapering of QE will remain a key short-term driver for USD crosses: indeed, we stay believers in a 12-month dollar uptrend which in itself suggests downside for dollar-denominated products. However, we also emphasise that a key issue will be markets testing central banks on their forward guidance, including whether a new Fed chairman will extend the current rules-based approach to monetary policy.

Albeit notoriously hard to predict, there is obviously a risk that the Syrian situation could propel oil prices higher, even from currently elevated levels. But, on the contrary, downside to prices may also be in store if the new Iranian government is successful in breaking the ice in negotiations over the country’s nuclear programme with the P5+1.

The greatest risks to our outlook for commodity prices to stabilise and then edge lower are central bankers failing to deliver as promised (e.g. Fed delaying tapering of QE and/or ECB failing to react if euro rates edge higher as excess liquidity drops) and/or severe supply setbacks in oil (e.g. caused by geopolitical unrest escalating).

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