The seeds of a rebirth in commodity prices might just have become visible now, but green shoots are a dream for the distant future. I am of course referring to news that commodity companies have been cutting back on major new investment over recent weeks. The age old problem of over-investment in the good times and retrenchment in the bad was thought by some to be a thing of the past, but.. “plus ça change, plus c’est la même chose” as they say! I describe this news as the seeds because for commodity prices to recover demand must again start to exceed supply, or at the very least the possibility of such a scenario is a necessity. We may never have another Chinese investment boom as the country has largely industrialised, largely but not completely. There is still the case for the Chinese hinterland in the north and west to catch up with coastal and central China, but it is unlikely that these less populous areas will have the same global impact as the first great multi-decade capital investment boom that raised the Chinese from little more than subsistence farming to the industrial power house it is today. If such a thing is to occur, Africa and India are the more likely regions. In any case, this news of capital retrenchment will be a huge blow to resource rich economies everywhere as the price of their staples already commanding far less in world markets are now compounded by less inward investment as well. Australia might be one of the few of such economies where there is a recognition that the currency needs to weaken, but self-knowledge is not a prerequisite for markets to correct. We expect the likes of the Russian rouble, Indonesian rupiah and Brazilian real to stay under pressure for a considerable period of time to come
The flip side of commodity price weakness can be seen in South Korea where a record current account surplus for the first half of the year was published on the back of lower oil import bill. Resource poor and a big importer of commodities, the boost from lower import prices has caused the rising surplus to become a concern to the Korean monetary authorities. Currency appreciation versus trading rivals has resulted in efforts now being made to encourage foreign investment. As they say, every cloud has a silver lining.
This week will see the hugely important non-farm payrolls report published in the United States, detailing the evolution of employment trends in the world’s largest developed economy. As we get closer to the Federal Reserve initiating interest rate normalisation, the key metric that central bankers are focused on is wage growth and the tightness of the labour market. It was written in the last minutes of the FOMC for all to see…”it will be appropriate to raise the target range for the Federal funds rate when..()… some further improvement in the labour market”. Enough said!
Later on today we get some ISM data as well, which will be a nice aperitif before the main course later on in the week. We expect further evidence that the US economy is powering ahead. We continue to believe that the next big moves will see the US dollar appreciate against the euro and pound sterling, but we remain as confused as everyone else about when this will happen. GBP remains stubbornly strong, the only thing I will say about it is that I believe EUR/GBP will be more relevant to determining how long sterling strength will persist. I am convinced that the competitiveness of the British currency in the context of its relationship with the euro is the most likely thing to dent its continued strength, but we might be some way from the peak at the moment. Time will tell…
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