The decisive monetary easing announced by the ECB today will have mixed effects on commodity prices.
The effect will probably be slightly positive for prices on base metals and oil, negative for the gold price and rather neutral for grains prices.
On Thursday, The European Central Bank announced a series of measures aimed at easing monetary conditions in the euro zone – see Flash Comment: The ECB fulfilled expectations for further details. Although the new stimulus will help the fragile euro zone economy gain further strength, the effect on commodity markets could be ambiguous.
Overall, commodity markets will feel the impact of the negative deposit rate from opposing factors. 1) On the positive side, a further strengthening of the economic recovery in the euro zone will benefit demand for commodities. We are particularly looking for a recovery in investments, which will lend a hand to demand for base metals. 2) The easing will continue the EUR/USD descend and we are looking for EUR/USD to reach 1.28 on 12M from the current 1.36 level. A lower EUR/USD will weigh on demand from euro-based commodity consumers.
The net effect of these two factors on commodity prices differs across different commodities. The demand for base metals and oil will benefit more from a pick-up in economic activity; however, base metals are relatively more sensitive in the short run to a lower EUR/USD. Demand for grains will probably not feel a big impact from a strengthening of the recovery and is also more immune to a renewed drop in EUR/USD. Gold will probably lose on both ends as the decision from the ECB today will add to risk sentiment and in return lead to a decline in demand for gold.
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