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

Neal Kimberley

Published: 4:00pm, 23 Mar 2021

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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.

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.

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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.

Those jurisdictions and currencies which are deemed best able to satisfy the commodity requirements of the recovering Chinese and US economies stand to benefit. During a gold rush, those who sell shovels to prospectors tend to prosper.

In the metals space, increased demand for iron ore might underpin demand for the Australian dollar. Similarly, Chile’s position as the world’s biggest copper producer, combined with Santiago’s impressive coronavirus vaccination roll-out, could support demand for the Chilean peso.

In the energy sector, the currency markets might rationally conclude that if the post-pandemic return to health of the Chinese and US economies equates to heightened demand for imported oil and gas, then the foreign exchanges might consider the merits of currencies such as the Canadian dollar, the Norwegian krone and perhaps even the Russian rouble.

Commodity currencies, especially in the energy space, might also find fresh favour with market participants as it becomes ever clearer that complexities in the China-US relationship are going to have spillover effects.

Chinese imports of Iranian oil have been on the increase. Iran has shifted about 17.8 million tonnes (306,000 barrels per day) of crude into China during the past 14 months, with volumes hitting record levels in January and February, according to analysis by Refinitiv Oil Research.

That does not play well in the United States. Washington continues to believe that Tehran is not fully complying with the terms of the 2015 nuclear accord and has imposed wide-ranging economic sanctions on Iran in an attempt to persuade the Iranian authorities to come around to Washington’s viewpoint.

Only last week, it was reported that Washington had specifically informed Beijing that those sanctions would continue to be widely enforced. China will not need to be reminded that in 2019 the Trump administration blacklisted a number of Chinese companies for allegedly shipping Iranian crude.

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That blacklisting did not play well in Beijing. That did not make Washington’s actions any less effective, though, however unpopular the concept of US long-arm jurisdiction might be with the Chinese authorities.

It remains to be seen how seriously China will take the Biden administration’s apparent reiteration of its commitment to enforce sanctions on Iran. If Beijing does decide to cut Washington some slack on this issue and reduce its imports of Iranian crude, the rebounding Chinese economy will still need oil and so China will have to import it from somewhere else.

Such is the heft of the Chinese economy, any such redirected demand for crude could help underpin oil prices. That in turn would reinforce a narrative that post-pandemic economic recovery in China and the United States means increased demand for imported energy and raw materials. On the foreign exchanges, commodity currencies might again start to look attractive.

Neal Kimberley is a commentator on macroeconomics and financial markets