Opinion: Commodity prices start to re-trace - negative for the NZD

By Roger J Kerr Our worse-than-expected employment data on top of the "no change" for Australian interest rates, has combined to provide the catalyst for NZD selling below 0.7000. I see the selling bias continuing over coming weeks as the Euro continues to weaken against the USD and commodity prices hurt the AUD. It was always expected that the reaction by global commodity markets to the tightening of monetary policy in China would be to drive prices lower. Any minor reduction in demand by China would tip the fine balance between demand and supply factors that drive the hard commodity prices. The pull-back in commodity prices over the past week has seen a breaking of the trend upwards in prices over the last 12 months (see chart below of the CRB Commodity Price Index). I view this as a significant development with so much fund manager and speculative money having been attracted to commodities when the prices were so low in early 2009. The commodity price gains were largely based on cheap money and the lack of alternative investments at the time. Commodity prices are no longer cheap, therefore genuine industry hedgers will be reluctant forward buyers and the speculators more likely to be sellers taking profits than fresh buyers. The messages that have come out of the 2010 World Economic Forum in Davos, Switzerland are that the global economy still has some major challenges ahead of it. As RBNZ Governor Bollard observed over the weekend, the world economic recovery is still very fragile. Put it all together, and the new Kiwi dollar downtrend looks set to extend further to 0.6500 at least. "”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com