The steep rise in commodity prices has been one of the most significant asset class swings thus far in 2021. We’ll go through how commodities have progressed thus far this year, what causes have fueled the upward trend, and what impact we believe it will have on the FX market in the following months.
How have Commodities Reacted so far this Year?
Since the start of 2021, commodity prices have climbed across the board, headed by a dramatic increase in global oil prices Best Commodity Stocks News that Brent crude oil futures have climbed by around 30% from $52 to $68, roughly where they were before to the COVID-19 virus breakout at the start of 2020.
Metals prices have risen dramatically since the beginning of the year, with sharp gains in aluminum (+18%), copper (+28%), and iron ore (+24%), the latter two to all-time highs. A comparable dramatic rise has occurred in agricultural prices.
The most notable swings have been a more than 40% year-to-date increase in the price of timber (+66%) and canola (+40%) to new all-time highs.
What Factors have Driven Commodity Prices Higher?
Global economic recovery is progressing more quickly than planned. In recent months, the United States’ effective vaccination program has allowed a significant loosening of viral containment limits, with most large nations expected to follow suit soon.
We’ve already witnessed a sharp recovery in China, one of the world’s top commodities users, which has done an outstanding job of restricting the virus’s spread. The speedy lifting of limitations has boosted investor confidence in a quick economic rebound, prompting economists to enhance their global growth projections for 2021.
Following this, market participants have priced in considerably stronger demand for commodities for the rest of the year. This, in our opinion, has been the primary driver of commodity price increases in recent months. Best commodity stocks news, supply shortages, we believe, will be a factor in driving commodity prices upward in the medium future.
What Kind of Impact has FX had so Far?
Unsurprisingly, the recovery in commodity prices has boosted the currencies of countries whose economies are heavily reliant on the primary sector. The Canadian dollar (+5.5 percent vs. the USD) and the Norwegian krone (+2.2 percent vs. the USD) have been two of the best performing major currencies in the G10 year to date.
Because developing countries rely on commodity output for a larger fraction of their GDP than developed countries, emerging market currencies benefit disproportionately from rising commodity prices.
What do We Expect Currencies to Perform in the Second half of 2021?
We anticipate that commodity prices have an opportunity to rise higher in the second half of the year and that additional rises in pricing could be seen once viral limitations in industrialized countries are lifted to a wider extent.
We grouped 10 major and emerging market currencies into two categories depending on the strength of their correlation with the Bloomberg Commodity Index in the past.
After that, we ran a simple regression to see how currency exchange rates compared to their historical behavior in connection to commodity prices. Based on that judgment, the majority of the currencies covered, particularly those from emerging nations, are undervalued.
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