BMO Capital Markets strategists suggested that China’s zero Covid policies and wider economic situations could impact currencies which should reap the benefits of higher commodity price increases.

While commodity prices rose in 2022, they are still high. Brent crudeTuesday’s price of commodity-based currency such as the climbed to its highest point since October 2014. Norwegian kroneAnd Australian, New ZealandAnd Canadian dollarsThey were relatively quiet.

The Aussie dollar had dropped 0.9% against the greenback as of Friday morning in Europe. Canadian dollars were also lower by 0.9%, with the U.S. dollarHad gained 0.55% over the Norwegian Krone.

“What we would typically expect to see is the New Zealand dollar rallying alongside agricultural commodity prices and Aussie rallying alongside base metals, but thus far this year, Aussie and Kiwi are both down — get this — against the euroAnd the yenGreg Anderson (BMO’s global head for FX strategy), said this on a podcast last Thursday.

Anderson acknowledged that these central banks from commodities-driven economies were less hawkish so far this fiscal year than the U.S. Federal Reserve. However, Anderson suggested that this could only partially explain the difference in commodity prices and commodity currencies.

He pointed out that swap rates for kiwi and Aussie dollars for two years, a derivative used by currency strategists to gauge the performance of currencies, had been underperforming the U.S. Dollar. This would support the theory that central banks are prone to policy divergence.

Anderson argued that while the Canadian swap rate is performing very similar to the U.S.’s, it doesn’t explain why CAD hasn’t rallied along with oil. Anderson added, “A further mystery is the way the AUD/NZD are losing ground towards.” the euroAnd the yenWhen swap rates are approximately flat,

Chinese demand

Stephen Gallo, European Head of FX Strategy Stephen Gallo said that China ripple effects could have an impact on the performance of commodity-based currencies in developed markets.

We know that China implements its policies. zero-Covid strategy. This has both implications for supply and demand. However, it may be feeding into China’s need for some raw materials,” Gallo stated.

We know that there was a power cut and factory closings in late 2013. The property market is evidently in a down phase. And we know that policymakers don’t add large amounts of fiscal or monetary stimulus despite their easing bias.

Gallo observed that China has shown evidence of slow nominal growth rates for some commodity imports. Import growth, however, is slower than export growth.

Are commodity-based currencies being affected by China’s growing economy? Yes, it could. Could China’s economy contribute to an increase in inflation later this year? He said that it was possible, but not certain.

Shifting the sands

Gallo suggested, over the medium-term that the Chinese government would be responsible for Made in China 2025 initiativeThe plan, which seeks to decrease China’s dependence on foreign tech imports, and heavily invest in domestic innovation could change the ways that global currencies are influenced by Chinese demand permanently.

It is not possible to know how the price fluctuations are affected by this policy, he said.

Gallo stated that the Chinese economic background may only have a partial impact on commodity prices. This is because there’s excess demand elsewhere in the world, which Gallo believes has been helped by very loose monetary and more important, loose fiscal policies.

“Maybe there is an element of green transition embedded into energy prices and base materials too. Maybe equilibrium prices are shifting for some commodities.”

Anderson predicted that equilibrium prices in commodities would become semi-permanently more expensive due to the shift in demand in base metals. This will be good news for metals-reliant currencies such as the South African rand or the Chilean peso.

“Buy the Dip”

Anderson suggested that investors “buy the dip”, in terms of current trades.

Both from a perspective of interest rate differentials and commodity prices, it should have rallied. But, it hasn’t. “I would be still looking to position to move up to 86, or so, by mid-2018 in Aussie-yen,” said he.

Gallo proposed that Gallo back the euro’s fall against the Canadian currency, saying this was supported in part by three important factors.

First, higher oil prices have compounded the effects of rising natural gas prices. The second is net trade. “The euro area experienced its first merchandise trade deficit last November, almost a decade ago,” he stated.

Third support beam: The expectation that divergence between the more-dovish European Central Bank (ECB) and the slightly more hawkish Bank of Canada might have to go.

“I don’t think there’s a large amount of money, given the Bank of Canada’s pricing, but I believe there’s still some left. “I think that euro-CAD can have a shot at the high 1.30s, before the cycle ends,” said he.