Can Commodities
Buck the Buck?
TABLE 1: USD APPRECIATION ACROSS THE BOARD ...
CommoditieshavebenefitedfromaweakeningUSdollarbut
(Percentage Change)
may not lose equally with a rebounding USD.
Year-over-year [Aug 15] Since July 15
ByHusseinAllidina&JeremyRFriesen
Australian dollar -5% 13%
New Zealand dollar 1% 9%
Swiss franc -10% 9%
THE RECENT BROAD-BASED declines in commodity prices and
Macedonia denar -7% 8% simultaneousincreaseintheUSdollarhavedrawnmuchattention
Euro -8% 8%
tothesystematicnatureoftherelationshipbetweenchangesinthe
Albanian lek -9% 8%
Pakistani rupee 27% 8%
USDandchangesinUSD-pricedcommodities.
British pound 7% 7% While these two asset prices are strongly related, their relation-
Isaeli shekel -16% 7%
ship has not been constant – though we believe it may be pre-
Bosnia-Herze convrt -9% 7%
Moroccan dirham -7% 7%
dictable. Specifically, we argue that a rising USD implies a much
Tunisian dinar -5% 6% weaker relationship than we have seen through the recent trend
Russian rouble -4% 6%
depreciation.
Colombian peso -8% 6%
Canadian dollar -2% 6%
For simplification, in the following analysis we look only at the
Japanese yen -5% 6% DXY trade-weighted USD.
1
However, commodities will have a dif-
Singapore dollar -8% 5%
ferent relationship to different currency pairs, depending impor-
Chilean peso -1% 5%
Iranian rial 3% 4%
tantlyontheexport-importnatureoftherelationship.
Malaysian ringgit -4% 4% The recent string of poor economic data seems to have broken
Peruvian new sol -6% 4%
thefinalsupportfortheglobaldecouplingthesis.TheUS-ledfinan-
Korean won 11% 3%
Taiwan dollar -5% 3%
cialheadwindscreatedbythecreditcrunchappeartobechalleng-
South African rand 6% 3% ingtherobustnessofemergingmarketgrowth.
Brazilian real -19% 3%
Alreadyfacinganoverhangofexcesshousingandacriticallylow
Kuwaiti dinar -5% 1%
Thai baht 11% 1%
willingness to lend, OECD economies seem to have been nudged
Chinese yuan -9% 1% overthecliffbyrisingcommodityprices.Thespreadofcreditprob-
Source: Bloomberg, Morgan Stanley Commodity Research
lemstoEuropeandJapannowseemstobeaffectingevenChina,
evidencedbyaslowdowninexportsandindustrialproduction.
TABLE 2: WHILE COMMODITIES HAVE DECLINED
Itwasthisrealisation,thatevenChinamaynotbeimmune,that
(Percentage Change)
likelycausedmostcurrenciestosuddenlyseemcriticallyvulnerable
Year-over-year [Aug 15] Since July 15
– reflecting truly broad-based global economic weakness. As a
Silver 2% -33%
result, the USD rallied against a broad range of currencies, not
Natural Gas 18% -29%
becausetheUSeconomylookedbetter,butbecauseofweakness
Soybean 44% -21% expectedelsewhere.
Gasoil 57% -21%
Heating Oil 54% -20%
... with all the commodities in the S&P GSCI priced in
Gold 18% -19%
Brent 57% -19% USD, a shift in this asset price should have
Corn 62% -18%
WTI 55% -18%
an effect on commodities
Gasoline 42% -15%
Lead -44% -15% While weakening economic data was having its own affect on
Cocoa 39% -15%
commoditysentiment,somesawthesurgeintheUSDasthecat-
Aluminum 10% -14%
Copper 0% -11%
alystanddriver.However,westillseefundamentalsplayingarole.
Nickel -29% -10% Several base metals have seen bearish news reports for months,
Zinc -48% -8%
withinventoriesreboundinginkind.Oilpricesalsofellonnewsof
Cotton 12% -8%
Sugar 39% -6%
a surge in oil supply and strong US demand destruction.
Coffee 11% -4% Notwithstanding the unwinding of long commodity short equity
Live Cattle 10% -1%
trades, fundamentals in much of the commodity space remain
Feeder Cattle -2% 1%
Lean Hog 10% 1%
unchanged,andconstructiveinourview.
Wheat 21% 2%
Since1995,muchofthiscommoditycomplexhashadanegative
Source: Bloomberg, Morgan Stanley Commodity Research
relationshipwiththeUSD.Figure1plotsthemonthlyelasticityof
changesinthetrade-weightedUSDagainstchangesintherespec-
38 SEPTEMBER 2008 COMMODITIES NOW
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