ANZ’s head of market strategy Richard Yetsenga reckons there is more going on in global commodities than just the dynamics of supply and demand.
He says even though there has been a big focus on the interaction of supply and price in the big price crashes of iron ore and crude oil, the broad-based nature of the commodity rout means US dollar liquidity is playing a big part in the falls.
While the focus in the past year has largely been on individual commodities — iron ore, coal, oil and increasingly copper — it has become a much broader story than that. In the CRB index, for instance, only 5 of the 19 components are up over the past year (Figure 2). Of the 14 that fell, only 4 fell by less than 10%.
This, he says, means “it’s hard to escape the conclusion that there are some common factors driving commodities”.
“While individual physical supply and demand factors have obviously been relevant to the timing of when individual commodities have moved, broader factors seem to be integral.”
That broader factor is the rise of the US dollar on the back of tighter US dollar liquidity.
The implications of this are stark.
Yetsenga says that if it is the US dollar and US dollar liquidity, then expectations that commodity price falls are good for growth are misplaced.
“It seems perfectly consistent with growth expectations being under some pressure and global bonds rallying.”