For the last century, commodity prices have been traded on physical delivery through the US dollar. Even the Futures market instruments are commonly traded in US currency regardless of whether the agricultural crop were grown in Asia, such as cocoa and rubber.
Generally, a cheaper currency indicates more buying capacity for the rubber commodity as transacted prices decline or vice versa. However, this might not be applicable on a long-term as the country might dip into ballooning debt or GDP contraction.
Since the post-financial crisis in 2008, China has been building its commodity Futures market very aggressively in the Shanghai Futures Exchange and Dalian Commodity Exchange. The purpose was to take control of the huge trading volume on domestic landscape instead of capital outflow to offshore markets. As the world’s second largest economy and largest economic powerhouse in Asia, China has more than 1.3 billion population and will decide the consumption rate of any commodity in the extreme point of inflation and recession.
On November 30 last year, the International Monetary Fund (IMF) announced the addition of Chinese yuan (also known as renminbi) into the Special Drawing Right (SDR) basket. The current combination in SDR basket includes US dollar, euro, pound, yen and Chinese yuan. This implies the validity of Chinese currency to be used as a major currency in the world and also part of national reserve among other countries.
On the challenging side, western central banks might begin to use the Chinese yuan as a counter-balance currency to devalue themselves as currency war begins.
Many economists reckoned that this strategy was adopted after Japan has been manipulated the strategy as a counter currency to rise against the dollar for past four decades, which now incur a government debt of 230 per cent to the annual GDP output.
Undoubtedly, China has begun to play an important role in lifting rubber prices since 2009. As it has consistently been in a slowdown phase for the past five years with contracting inflation, demand for rubber prices also fell accordingly.
Moving into the future, we foresee the China’s rubber Futures will become the largest globalised market (it is already the largest now but it is still limited to domestic account traders only) and Chinese yuan might replace the US dollar as an influential tool for the rubber’s price mechanism.
The initial catalyst of price movement in the rubber commodity is always subject to the currency used to transact it. If the currency is the world’s major reserve and is not limited to capital control, this will add higher liquidity and volatility to the price trend. This study factor can trigger an instant short to mid-term forecast based on instantaneous fundamental news!
In commodity study, we usually classify short-term trend as 1-month cycle; mid-term trend as 1-year cycle; long-term trend as five to 10-year cycle since this final periodic oscillation always contain a major reversal in price movements.
In my personal opinion, I would stay optimistic of the prices of commodity as the next uptrend cycle will soon emerge as we approach the end of 2016.
Always remember that the world economy is never perfect since it moves in a cycle. As the world advances alongside with the growing population and technology, every inflation cycle will usually surpass the previous top. Start tracking the commodity prices at their bottom prices now.
DAR Wong is a registered Fund Manager in Singapore with 26 years of market experiences.The contents are his sole opinions. He can be reached at [email protected]