Responding to the decided chilling of the global economic backdrop, commodity prices have beaten a hasty retreat in recent weeks. Brent crude has dipped below USD 110 a barrel for the third time since QE3 was announced and is likely to test critical support at the 100d moving average of USD 107.67 before too long. The copper price has dropped 7% since the Fed resorted to unbounded asset purchases in the middle of last month, the gold price is down near USD 1,700 after testing USD 1,800 earlier in October and the price for US hot-rolled steel coil has fallen 13% since the end of August. Cognisant that additional asset purchases by the major central banks are exhibiting diminished effectiveness in terms of stimulating growth, many money managers are reducing their exposure to ‘real’ assets at a time when their general appetite for risk is flagging. This process of reducing risk probably has some way to run given narrow risk premiums in the major asset classes and poor growth prospects (as exemplified by the disappointing earnings being reported by US companies).
Interestingly, typically high-beta currencies such as the Aussie and the Scandis have hardly responded to this latest swoon in commodity prices. This further emphasises a point we have been making for some time, that those currencies with the highest sovereign debt rating and respectable internal fiscal and growth dynamics continue to attract strong demand from sovereign wealth funds and other investors who are keen to preserve the value of their capital. For example, the Aussie is barely changed against the dollar this month, despite a worsening of the terms-of-trade and the likelihood that the RBA will cut rates further in coming months.
As such, those who are minded to sell the high-beta currencies because of concerns that the global economy is slipping back into recession need to be careful that they are not blind-sided by the tide of capital still chasing a shelter from the global financial storm.