Short euro, strong commodities

Short euro, strong commodities

 There appears to have been an important break in currency and commodity markets, with a still
negative view on the Euro not weighing too heavily on commodity currencies or the prices
themselves. Metal prices also appear to have rallied much more in emerging market currencies
than the more heavily traded commodity currencies like the AUD since the lows in late 2011.

 The USD has generally been weaker since the start of the year, which has been a factor
supporting stronger commodity prices. It does appear, however, that there has been a distinctive
shift in views from late 2011 between currencies and commodities. There has been a large
increase in speculative short interest in the Euro, but positioning in metals has been less definitive.
This suggests that either there is a huge divergence between expectations of commodities and
currency traders, or that a view on the Euro is no longer as central to views of investors.

 Net non-commercial positions attempt to measure the speculative interest in futures on CME,
although the data does have issues with reliability. Nonetheless, the number of net shorts on the
Euro is at a record, with the increase in net shorts particularly rapid. This, however, hasn’t swayed
the Euro from strengthening since the start of the year, with short covering potentially having a
role to play.

 Positioning in metals markets is much less definite. LME open interest data suggest there are
some new longs in copper, while aluminium and zinc have seen short-covering supporting prices.
Comex data have also seen net longs on copper shift back into long territory after being short into
end 2011.

 The performance of commodity currencies has also appeared to diverge away from the fortunes of
the Euro. Direction in currencies like the Australian dollar, the South African rand and the
Brazilian real largely seemed to be dictated by the Euro in 2H11, particularly when markets were
most fearful in the latter stages of the year.

 But since the start of the year, these currencies have had their own positive momentum without a
huge amount of direction from the Euro. This is important as it is another sign that the problems in
European-driven currency risks are a diminishing concern for those wanting more exposure to
commodity and emerging market currencies.

 These divergences in commodity and currency markets have important implications for prices
realised by producers in different countries. In general, the huge capitulation in emerging market
currencies in September and the slower recovery mean that the commodity prices in these
currencies have recovered more strongly.

 For example, the copper price in Chilean pesos is now above where it was at the start of
September (Figure 4). The iron ore price in Brazilian real has also jumped more aggressively than
in AUD. These gains for emerging market producers, however, may not last, as an improvement
in risk appetite should bring more aggressive currency appreciation.

 For PGM producers, a stronger rand is always an unwelcome development. But the rise in US$
metals prices have offset this since the start of the year. Nonetheless, the PGM basket is still only
where it was mid-last year, with producers suffering big productivity losses heading into the end of
2011.