Commodity and Foreign Exchange Outlooks Q3 2015: What happens when fundamentals reassert over sentiment?

The commodity cycle is turning. Excess supply is being cut back across a broad range of commodities. While it will take time to run through years of surplus stock, the trend is now set in the right direction….

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However, with the exception of a few select commodities such as oil, most prices do not reflect the stronger fundamentals. Sentiment remains stubbornly negative as multiple years of poor performance has jaded investors. As sentiment realigns with fundamentals there is scope for strong price gains.

Volatility has been a pervasive force in G10 currency markets in recent months, a product of the ongoing Greek saga and the focus on the potential of tighter monetary policy in the US. While sentiment has been a key driver of policy moves recently, we expect underlying growth and policy fundamentals to become more a focus for investors in the quarter ahead. Central bank policy will reassert its prominence as a currency performance determinant and the expected divergence of monetary policy, as the recovery paths of major economies differ, is expected to continue over the coming quarter.


Sentiment rather than fundamentals has been driving many commodity prices and we believe that once fundamentals regain influence, we could in some instances see a significant re-pricing. A strengthening US Dollar could weigh on prices at the margin. A summary of key trend follows:

Industrial Metals

Although fundamental conditions appear to be tightening for a range of industrial metals, other factors are keeping gains in check. A broadly stronger US Dollar and concern over Chinese demand are having a restraining affect, but we expect the influence of these factors to fade over the second half of 2015.


While gold has been trading in a relatively tight range between US$1160/oz and US$1225/oz in Q2 2015, we think the metal will trade higher by Q4 2015, as global policy stimulus will remain in place and the metal’s role as a risk hedge will become more pronounced.

Platinum Group Metals

Tightening emissions regulations in Europe should see demand for PGMs, which are used in pollution abatement equipment, increase. Meanwhile a rebound in auto demand in US and China will continue to see growth in palladium in particular. Supplies are likely to remain tight even though no substantial miner strikes have broken out this year so far.


The constant struggle for market share will see oil prices initially decline as OPEC in particular will continue to produce more than the market requires. However, the tightening supply from high cost producers outside of the US will eventually see prices recover.


We are currently in an El Niño weather event that has intensified to a moderate strength. For some crops, an El Niño could boost production, while for others it could damage production. Should the El Niño intensify further, we expect better growing conditions for coffee (a reduction in frost damage in South America) and soy (better growing conditions in US), which will weigh on price. Elsewhere, primarily drier, hotter weather in key growing areas could spoil conditions for wheat, corn, cocoa and sugar cane, acting as a catalyst for price gains.


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