Commodities: Weaker Dollar lacks growth catalyst – BNY

Geoff Yu at BNY says a less hawkish Fed has weakened the Dollar, but this has not translated into a broad commodity rally. Institutional investors remain sellers of metals and miners, while EM commodity sovereign debt continues to struggle and commodity FX buying has faded. A sustained recovery, he argues, requires stronger global demand, particularly from China.

Dollar softness not enough for broad rally

"A less hawkish Fed has weakened the dollar but hasn’t generated a broader commodity bid. Commodity FX buying faded quickly, institutional investors remain sellers of metals and miners, and EM commodity sovereign debt has struggled despite lower U.S. real yields. The missing ingredient remains growth: without stronger global demand, particularly from China, easier financial conditions alone aren’t enough to sustain commodity-linked assets."

"Gold aside, there’s still no sign of the broad commodity move needed to revive the “debasement” trade that dominated markets in January and February."

"The message is that Fed credibility matters, but correlated trades across global assets also need a credible growth backstop. That’s difficult to achieve if U.S. data begin to weaken materially. Without stronger global demand, a weaker dollar alone is unlikely to recreate the commodity trade seen earlier in the year."

"The weaker-dollar view is intact, but that doesn’t automatically translate into stronger commodity prices or stronger commodity-linked economies, particularly while U.S. investors remain comfortable with domestic nominal and real yields."

"Commodity economies therefore need to generate their own growth and total-return narrative before they can fully benefit from easier global financial conditions. The earlier combination of a wide yield advantage over the U.S. and strong Chinese demand boosting export revenues isn’t returning."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)