Chinese stocks collapsed today on monetary-tightening fears, and commodities have taken it on the chin as well.
Morgan Stanley provides a piece of timely insight, however.
Chinese policy tightening, such as via bank reserve ratio hikes as we saw on Wednesday, hasn’t spelled doom for commodity prices in the past, and thus commodities could ultimately move higher:
The PBoC’s RRR hike on Wednesday, the USD/CNY reset at a new post-2005 revaluation low and official talk about controls to cap commodity prices amplified the significance of today’s upside surprise in the October CPI. Inflation pressures are mounting rapidly and last month’s policy rate hike now appears less like an isolated move and more like the first step in an extended tightening cycle.
CNY proxy trades, particularly long AUD positions (and to a lesser extent NZD and CAD) will be the first casualties in a new PBoC tightening cycle.
Against this backdrop, tactical shorts versus EM Asia or the safe-have currencies like CHF are attractive. Historically however, we have seen that policy tightening in EM Asia triggered temporary setbacks, but not persistent declines in commodity prices and the G10 commodity currencies. Exhibit 1 shows that commodity prices ultimately rallied by 50% during China’s 2006-08 tightening cycle, as markets quickly recognised that policy tightening would extend rather than derail the economic expansion. Admittedly, the global economy is significantly weaker than in 2006-07: we forecast 4.2% global growth in 2011, a full point below the 2006-07 average, so there is a risk that de- leveraging would prove more extended in the current environment. But, as an offset, commodities and the commodity currencies have extraordinarily easy G3 monetary policies in their corner.
(Via Morgan Stanley, FX Pulse, 11 November 2010)
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