Currencies flag risks to bullish growth

Commodity-led nations such as Australia, South Africa and Brazil are struggling

If you’re in the business of poking holes in the reflation trade, this may be an opportunity.

While they’ve driven gains in 2017, currencies of commodity-led nations such as Australia, South Africa and Brazil are struggling to regain the momentum they enjoyed before Donald Trump’s election sparked a year-end reversal. This could foreshadow an element of doubt in the global recovery as they are often seen as barometers for world growth given their countries’ reliance on international trade. That’s especially so given signs the rally in commodity prices is close to exhaustion and poised for a pullback.

“If the dollar rallies commodities will sell off,” said Tim Condon, head of research in Asia at ING Bank in Singapore.

Details on the US president’s planned tax overhaul could revive demand for the dollar, he said. “That’s a huge headwind for commodities.”

After jumping to a seven-month high earlier this month, the Bloomberg Commodity Index has been in retreat. At the same time, a custom gauge of currencies from nine resources-linked nations — Australia, Brazil, Canada, Chile, Indonesia, New Zealand, Norway, Russia and South Africa — is holding below a trend channel drawn from the January 2016 trough along levels before the US election.

Evidence mounts that commodities may be turning. There are some who expect that commodity currencies will regain momentum, and that’s because they trust that global growth will be strong enough to reinvigorate demand for raw materials.

“The rally in commodity currencies is quite sustainable,” Jun Kato, who helps manage about $8.9 billion (Dh32.6 billion) at Shinkin Asset Management in Tokyo.

“The general trend is for a global economic recovery and for inflation to accelerate gradually.”