RPT-GRAPHIC-Soaring commodity prices leave emerging currencies adrift
(Repeat Wednesday story without changes)
By Karin Strohecker and Saikat Chatterjee
LONDON, March 10 (Reuters) – Talks over a commodity “super cycle” and price gains from iron to copper have brightened the outlook for resource-linked currencies, but the tide has not lifted all boats, emerging market currencies struggling to keep up with developed peers.
Emerging currencies have been at the forefront of a recent rise in US Treasury yields, which has sparked upheaval in global markets.
Below are four charts showing the connection between commodities and currencies and how the current moves compare to previous episodes.
1 / BALANCE SHEET
Commodities, from petroleum and iron ore to coal and copper, play a crucial role in determining the future prospects of currencies like the Russian ruble and the South African rand.
After hitting lows in 2020, the gains have been impressive: Oil prices have more than tripled since the Saudi-Russian crude war saw prices drop below $ 20 a barrel.
But a mix of slower vaccination rollouts, declining growth prospects, rising debt and geopolitical tensions have crippled currencies in many emerging markets.
“It is simply a reflection of the fact that the domestic risks and the risk to the pace of the domestic recovery in these emerging market commodity currencies are greater,” said Aaron Hurd, senior currency portfolio manager at State Street Global Markets.
“You face national risks, and I’m specifically referring to fiscal risks, and debt levels are much higher.”
2 / PAST AND PRESENT SUPER CYCLES
Compared to previous super cycles, commodity-linked emerging currencies got off to a much slower start, Morgan Stanley noted.
In the rebound in commodities that immediately followed the global financial crisis of 2008, and after the rebounds that began in late 2010, 2014 and 2015, the recovery phases lasted around 21 weeks.
In each case, an average 15% rise in commodity prices translated into a rise in commodity-linked global currencies by around 7-8% against the dollar and commodity-linked emerging currencies from 1 to 4% depending on the region.
“At the 21-week stage of the current cycle, commodity prices have also risen by around 15%, but with a much more subdued performance from global currencies,” Morgan Stanley’s James Lord said, citing lower returns, lower growth and deteriorating debt sustainability as reasons. for underperformance.
“Emerging currencies in particular had barely come off the ground.”
3 / DISPLACEMENT STATIONS
Positioning data shows investors have pulled back from emerging market currencies in recent weeks. Following the euphoria in emerging markets in early 2021, many large banks, including Morgan Stanley and JPMorgan, have moved to a more cautious stance.
While the overall dollar positions show a large short bet of $ 29 billion, a look below the surface reveals a big difference in the positions.
For example, hedge funds are holding their biggest short bet in four months against the Brazilian real, while net long bets on the Australian dollar are at their highest for five months.
4 / RRSP STAMPS
However, when comparing currencies to the average real effective exchange rates over the past five years, emerging commodity currencies are more undervalued than their G10 counterparts, said Francesco Pasole, FX strategist at ING.
“The relatively attractive valuation is one of the factors that make emerging market currencies (including the commodities segment) less vulnerable to rising US Treasury yields compared to the ‘taper tantrum’ situation before. 2013, ”Pasole said.
(Reporting by Karin Strohecker and Saikat Chatterjee; editing by Catherine Evans)