Commodities currencies had a difficult start to the month, trending lower with the prices of raw materials. It was a continuation of a general move that has been going on since earlier in August. But, over the last few days there has been a bit of a rebound. The question is whether we can see a return to sustained growth or is it just a bump higher before resuming the downward trajectory.
The main issue is sluggish growth in China, which has left inventories of commodities building up in its warehouses. The abundance of supply has naturally pushed the prices of those goods lower. One in particular has been crude, as slower development in China is seen implying less demand for oil from the world’s largest importer.
Signs of a Rebound?
China’s doldrums as a result of extensive pandemic restrictions and slowing of the housing market are well-known. What has been of particular concern recently is the underperformance in the manufacturing sector, which showed contraction in both the official and private PMIs for August. Large steel manufacturers in China have been running at a loss, due to slow demand, which in turn has pushed the price of iron ore below $100/ton. Naturally this has an impact on Australia, which is the largest source for iron ore to China.
What has helped turn sentiment around is a surge in exports out of China. More broadly, the market has been worried about a global economic slowdown, not just in China. The US is seen heading for at least a “soft landing” after an extensive period of restrictive interest rates. European economists are debating whether the Eurozone will fall back into another technical recession. So an uptick in demand for Chinese products could be a sign that those economies might also be doing better than expected.
A Delayed Reaction
If growth in China leads to increased demand for manufacturing, companies could reduce large inventories of raw materials over the next several months. As that happens, investors could recover confidence in renewed demand for commodities, which could by extension give commodity currencies a boost. But that relies on global data trends reversing in the near future, which is a hard thing to accomplish.
The other factor is the weakening dollar which allows for higher price differential with commodities. This is one of the factors in gold hitting new record highs, recently. That could come to a head next week with the Fed’s interest rate decision, as weakness in the greenback has been driven in part by a minority chance of a larger rate cut next week. A resurgent dollar from a more hawkish than expected Fed could clip the wings of the commodity resurgence.
Seasonal Growth
The other factor is that the latter half of the year is typically when there is increased demand for industrial commodities, such as copper, aluminum and coal. Fuel prices tend to be higher through the winter as well. This provides a generalized upward trend for commodities assuming there isn’t a significant slowdown in the economy.
China has also underperformed in the first half of the year, but has maintained its growth target of 5.0% for 2024. The government is under pressure to increase stimulus to meet that target, since it would require faster growth in order to offset what happened in the first two quarters. That also could be a factor to support commodities from now to January.