Which came first the commodity fall or the local currency collapse? And, more importantly, how far through the commodity supply/ demand adjustment are we?
The suggestion here from SocGen’s Kit Juckes and friends is that the causality runs from commods to currencies and that there is still a lot of pain to come:
My colleague Michael Haigh has done a lot of work on the overall state of supply and demand in commodity markets, and he makes one very striking observation: For all the fall in the prices of many industrial and agricultural commodity prices in USD terms, the prices in the currency of the biggest producers have not necessarily fallen much. Sugar prices have fallen by over 8% this year in USD terms, but the Brazilian real has fallen by 29%. Copper prices have collapsed, down over 20%, but the Chilean peso is down 15% and trying hard to keep up. Gold is down 9%, but the South African rand has fallen by twice as much and in rand terms, the gold price is near its highs. The fall in iron ore prices (over 30%) is twice the fall by the Australian dollar, but you get the picture (Charts 1 and 2).
Currency adjustments have resulted in the cost of mining/producing a lot of commodities holding up rather well in local currency terms. So supply is not being cut as a result of the falling dollar price, the glut in many cases persists and will do so until demand picks up.
Which you’d have to say it won’t, unless you find a way to make the China story appear much rosier for commodity demand than it appears from where we’re sitting. You can disagree about the actual level of growth in China but not many disagree about the direction their figure of choice is heading.
Which if you’re a commod dependent EM is bad news.
As SocGen suggest:
This is a recipe for an undershoot in both industrial commodity prices [Oil btw gets a pass] and the currencies of the countries that are most affected… We will remain very nervous of another China-inspired fall in commodity and China-sensitive currencies in the months ahead, especially if/when we get closer to the day when China’s leadership concludes it has no choice but to allow the CNY to weaken…
Choose your own adventure, China contagion edition – FTAV
Copper says it’s not looking good for China’s “old economy” – FTAV
Goldman vs China’s statisticians – FTAV