Commodities Recovery: An FX Game Changer?

Lior Alkalay - Contributor - Forex

It's been less than a week since the big chiefs of the commodities world met at the FT Commodities Global Summit in Lausanne, Switzerland, situated along the beautiful banks of Lake Geneva, yet already the markets have begun to adjust its collective expectations. So what's all the fuss about?

Quite simply, all of the commodity moguls, from Gunvor to Glencore to Vitol, all among the largest private companies in the business, have proffered one clear message and it is this: That they, nearly to a one, expect a healthy recovery in commodity prices. With all of the big shots expressing an upbeat view it becomes clear that they are acting on far more information than the rest of us, as one might surely expect, as being in the commodity business allows them ready access to more tangible and viable data. That nearly unanimous upbeat tone should be taken as a rather clear sign that we are about to see a bounce back in commodity prices. Surely, with currencies such as the Aussie, Kiwi, Loonie and the Norwegian Krone, and many more currencies beyond those, being highly sensitive to commodities prices, we are likely to see perhaps a significant impact in the FX arena.

Two Big Predictions

Although the talk at the Commodities Summit was on commodity prices, in general, it was evident that two sectors had drawn more attention than the others. Oil, naturally, because of its importance to the global economy but also Iron Ore, a key ingredient in the making of steel and one of the major commodities exported to China.

Iron Ore prices have now recovered by roughly 15% from their low amid talk of more stimulus and more monetary easing from the Peoples Bank of China in its ongoing efforts to stimulate the economy and allow China's housing market to recover. With China being the world's largest Iron Ore consumer and with Chinese traders increasing their stockpiles in anticipation of further gains, many predict that more upside is to come for Iron Ore.

Although most Oil chiefs were upbeat on Oil, one prediction caught investors' attention; that was the prediction made by Tony Hayward, the former CEO of British Petroleum and the incumbent chairman of Glencore, one of the largest commodity traders in the world. According to Mr. Hayward, Oil prices have bottomed out and Oil will now be heading to $80, undoubtedly a number we haven't heard for a long while in the context of Oil. The pillar of Hayward's prediction is the quick reduction in Oil rigs in the US, signaling a sharp reduction in US oil output, with many companies cutting back on future investment in shale oil production. With the US shale Oil boom being a key factor in the steep downfall of Oil prices in the first place it's understandable why the Oil chief expects a robust return in prices.

Two Laggers to Avoid

In fact, we have talked about the possibility of a rebound in Oil prices for while, with the chances of the Yemen conflict threatening Oil supplies and given the reduction in Oil prices. Now, the key questions are which currencies stands to gain from all of this and how durable will this trend be?

Although most commodity linked currencies will stand to benefit, somehow, it's fairly obvious which two currencies are the least favored. The first is the Russian Ruble, because despite having an upside potential (in the event Oil prices do recover) the political uncertainty and risk of sanctions make the Ruble a risky long term bet. And the second currency to be less favored in the commodity pack? It is the Canadian Dollar, aka the Loonie. Despite having an upside potential from Oil prices and the surge in commodity prices, in general, there are two factors that hurdle the Loonie's chance to yield better returns than its peers in the commodity space. The first is the fact that the cost of production per barrel in Canada is one of the highest in the world; hence, Oil prices would have to recover substantially more in order to lift growth in Canada and boost the country's exports yet the Canadian economy would still lag versus its peers. And the second reason? Canada's major export destination is none other than the US, and with the US still having record reserves of its own Oil, it's clear that the liftoff in demand for Canadian Oil in the US will be much slower than it will be for Oil exporters in other areas of the world, i.e. Asia or Europe.

The Outperformers

While there are some potential laggers to this brewing recovery there are some currencies best positioned to outperform. The first would be the Aussie, with its high exposure to China and Asia, in general, and with Iron Ore being one of its major exports to China. The second would be the Norwegian Krone, because while the Krone is oriented towards Oil, unlike the Russian Ruble there is no political uncertainty to weigh on the currency. And unlike Canada, most Norwegian North Sea exports are headed to Europe or Asia. How will this massive trend brew into targets for those currencies? In the next two articles, I intend to crunch the fundamentals of the two and shed light on what I deem as a probable target for the two currencies in the eye of the big commodity rotation.

Look for my post next week.

Lior Alkalay Contributor - Forex

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.