- Commodity outlook dampened by oil and precious metals in near term…
- …but we expect CRB index to firm later in the year on stronger global demand
- Dollar has a strong start to the week and further gains are expected this week
Stabilisation following the commo correction
Since the start of this year, the CRB index has stabilised after the sharp fall seen at the tail-end of last year. The key factor behind the break in the correction is that oil prices have regained their footing. We expect the CRB to move sideways to slightly lower on the 3-month horizon. On the plus side, we expect to see higher base metal prices, which will benefit from the upswing in global demand.
Weakness in oil prices in the near term
On the other hand, there could well be further near-term weakness in oil prices and precious metals. Indeed, the nuclear deal with Iran is negative for oil prices as sanctions may be lifted in the coming months. As a result, Iran’s oil exports could see a fresh boost to pre-sanction levels in the following months. In an already oversupplied market, this news added to the pressure on oil prices.
Downturn in precious metals
Precious metals will also likely suffer as a stronger US dollar and higher US interest rate expectations lead to further investor position liquidation. In the case of grains and soft commodity prices, we expect a stabilisation in prices after the sharp price weakness in Q1 of 2015.
CRB index to firm later in the year
Going forward, we expect the CRB index to rise later in the year. Fundamentals for cyclical commodities will improve in our view, leading to a recovery in WTI (later this year) as well as most base and precious metal prices (excluding gold). Oil prices should be supported by lower US crude production in the second half of the year.
We also expect base metal prices to rise driven by supportive fundamentals, but a stronger dollar will likely limit gains in prices. Later in the year we expect precious metal prices to start diverging. We continue to expect a further large decline of gold prices because of a higher US dollar and rates. But economic fundamentals will come to the rescue and support silver, platinum and palladium prices in contrast to the situation in the case of gold prices.
Strong US dollar gains on Monday
The US dollar has started the week strongly, rallying across the board. Early on Monday, EUR/USD dropped to the low 1.0520s, while USD/JPY rose above 120.80. Precious metal prices have felt the brunt of a higher US dollar. What has triggered this rise in the US dollar? For a start, weaker than expected Chinese trade data resulted in weakness in commodity currencies such as the Australian dollar, the New Zealand dollar and the Canadian dollar. Later during the day, the rise in 10y US Treasury yield resulted in dollar gains versus European currencies and emerging market currencies. Afterwards the dollar gave back some gains because USD/JPY dropped sharply after Koichi Hamada, advisor to PM Abe, said that USD/JPY at 105 is appropriate given purchasing power parity.
Further upside for the dollar
We are upbeat on the outlook for the US economy and continue to expect the Fed to hike this year, which is a major dollar positive. US dollar gains could continue this week on a rebound in retail sales and firm CPI inflation numbers. Meanwhile, the ECB will probably continue to play down an early exit from QE, which is euro negative. Our EUR/USD target for the end of June is parity.