16 Dec 2015
FOMC: Lift-off might help stabilize commodity prices if the USD follows its traditional path – Goldman Sachs
FXStreet (Delhi) – Matthew Ross, Research Analyst at Goldman Sachs, suggests that while their bearish view on the outlook for most commodity prices is driven predominately by concerns over excess supply, their forecast for a stronger USD (as US interest rates normalise) is also a factor.
Key Quotes
“Over the long term most commodities that are priced in USD have shown a strong negative correlation with the USD. This has certainly been true through the most recent cycle. Since Jun14, the USD Index has strengthened 22% while the CRB Commodities Index has fallen 27% (oil is down 65%, industrial metals down an average of 30%).”
“Our economic team's view that the vast majority of central banks outside the US will be either on hold or easing policy gives us comfort that the USD will continue to appreciate, but history is not on our side. The tightening cycle that commenced in 1988 is the only 1 of the previous 5 cycles where the USD appreciated and it was likely the most unanticipated coming only months after a previous rate cut.”
“While we have consistently argued that fitting historical precedents to this cycle will be fraught with danger given the unprecedented length and magnitude of the current easing phase, we do find it interesting that the market has typically anticipated too much USD strength into US rate hikes. If history repeats this could be one bright spot in an otherwise bleak outlook for commodity prices.”
Key Quotes
“Over the long term most commodities that are priced in USD have shown a strong negative correlation with the USD. This has certainly been true through the most recent cycle. Since Jun14, the USD Index has strengthened 22% while the CRB Commodities Index has fallen 27% (oil is down 65%, industrial metals down an average of 30%).”
“Our economic team's view that the vast majority of central banks outside the US will be either on hold or easing policy gives us comfort that the USD will continue to appreciate, but history is not on our side. The tightening cycle that commenced in 1988 is the only 1 of the previous 5 cycles where the USD appreciated and it was likely the most unanticipated coming only months after a previous rate cut.”
“While we have consistently argued that fitting historical precedents to this cycle will be fraught with danger given the unprecedented length and magnitude of the current easing phase, we do find it interesting that the market has typically anticipated too much USD strength into US rate hikes. If history repeats this could be one bright spot in an otherwise bleak outlook for commodity prices.”