Commodities to weigh on commodity-FX, watch copper suffer COVID-19

The Thomson Reuters/CoreCommodity Index CRB index has dropped to the lowest levels since June 1999 on Monday, hitting a low of 132.33. The Index represents 19 commodities, grouped by liquidity into 4 groups with petroleum products capped at 33%, other 3 groups equal-weighted.

The impact of COVID-19 on domestic consumption throughout the world will likely move in tandem with a blowback from slowing global trade flows which in turn will impact commodity prices for which the markets are pricing in. 

Global energy is sapped, taken down by the flu

Oil prices are camping out below $30 a barrel (CTAs are heavily short) as energy demand is nowhere to be seen – the world is on shutdown, borders are closed and travel restrictions have been implemented. To make things worse, we even have a supply-side shock pertaining to the price war between the Saudis, Russia and the UAE."Indeed, crude demand could very well fall in the realm of -500k bpd in y/y terms, with some in the market even anticipating as much as 10m bpd of lost demand through Q2," analysts at TD Securities explained. 

Doctor Copper knows 

As for base metals, confidence is critical to the market and so far, the Federal Reserve's bold move yesterday has done little to instil confidence into the markets. While the Fed's and central bank injections are welcome, it's not the type of immunity injection the world is looking for right now, which is reflected in the price of copper – demand for copper is often viewed as a reliable leading indicator of economic health. Doctor Copper knows that COVID-19 needs a different prescription – fiscal stimulus and that time's a healer.  Copper CFDs fell to their lowest level since November 2016, despite the weekend's central bank interventions and a subsequent drop in the US dollar. Looking to the copper chart, there is more downside to come on a technical analysis towards 2.22.

Gold to outpace other precious metals when the dust settles

One of the paradigm shifts in markets pertaining to the COVID-19 catalyst is the price of precious metals falling despite the widespread panic and a major sell-off in global equities. Cash is king and margin calls have seen investors cashing in on the precious metals bull market to cover losses everywhere else, seeing gold prices post their largest weekly decline since 1983. However, we have seen this correlation breakdown before. 

"The current gold market selloff is similar to what happened during the financial crisis, when prices dropped for a period of over three months along with collapsing equity valuations, as increased volatility and margin calls forced levered investors to sell to provide liquidity," 

– analysts at TD Securities explained. 

While we could expect a rush back into gold when the dust settles, volatility declines, but risk-off persists, industrial type-demand precious metals, such as palladium, could well continue to struggle. 

Dollar bloc-FX to feel plenty more COVIC-19 aches and pains 

The meltdown in industry demand will continue to weigh on currencies such as AUD, NZD and CAD, stripped down to the bone of carry-trade attractiveness, now unable to benefit from any USD weakness stemming from falling US rates. The NZD could well outperform both CAD and AUD on relative terms so long as the Reserve Bank of Nw Zealnd stays put following yesterday's statement. The risk for CAD and AUD are pending moves towards QE.