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Currencies
Opinion
Neal Kimberley
Neal Kimberley

Macroscope | Coronavirus recovery: surging US, China economies could spark demand for commodity currencies

  • Those jurisdictions and currencies best able to satisfy the energy and raw material requirements of the recovering Chinese and US economies stand to benefit
  • Commodity currencies might also find fresh favour as it becomes ever clearer that complexities in the China-US relationship are going to have spillover effects

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Labourers work at a steel plant in Jinan in China’s Shandong province in July 2017. Increased demand for iron ore might underpin demand for the Australian dollar. Photo: Reuters
Neal Kimberley
Beijing and Washington are now looking beyond the Covid-19 pandemic. Although Federal Reserve chair Jerome Powell last week pointed to strong data ahead, the US central bank will stick with its ultra-accommodative monetary policy. Beijing, meanwhile, has set an economic target of above 6 per cent for China this year.

Markets will have to consider the complexities of China-US relations in their calculations, but the prospect of this joint economic resurgence should generate trade opportunities. On the foreign exchanges, commodity currencies could prove to be winners.

Fed officials are forecasting that US gross domestic product (GDP) will expand by 6.5 per cent this year with inflation reaching 2.4 per cent, well above the central bank’s 2 per cent target. Even so, Powell’s view is that it is too soon to even talk about tapering off the US$120 billion of Treasury bonds and mortgage-backed securities the Fed is buying each month to further prop up the US economy. 

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Additionally, Powell said the “strong bulk” of the policy-setting Federal Open Market Committee expects no interest rate increase until at least 2024.
The bond markets will undoubtedly have something to say about the Fed’s continuing determination to dismiss the expected rise in US inflation as temporary. From the perspective of the foreign exchanges, perhaps the US central bank’s stance could prove to be the catalyst for some renewed, though targeted, US dollar weakness.

01:33

China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years
The Chinese economy is already rebounding at a strong pace. If the Fed’s expected trajectory for US economic activity in 2021 appears plausible, this could generate demand for energy and raw materials. The attention of the foreign exchanges could well be drawn towards the currencies of economies which will be key suppliers of those commodity needs.
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