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Commodities slide as investors misread policy signal

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Confusion around China’s currency policy is driving volatility across the commodity complex, according to ETF Securities Commodity Monthly Monitor for August/September.

With many market participants thinking the change in Chinese currency policy was a competitive devaluation rather than a move to introduce more market dynamics, fears that the authorities have become desperate to reignite economic growth has led to a sell-off in cyclical commodities. At the same time, the gold price has benefited, reversing some of the negative sentiment towards the metal seen in past months. 

ETF Securities writes: “As the dust settles, we believe that industrial metals will grind higher as supply tightens and the market realises that Chinese demand is not bad as feared. Although consensus expectations are for a Federal Reserve rate hike in September, recent Fed minutes indicate it is not a sure thing and so some of the US dollar pressure on commodities may ease. The capitulation in oil prices has driven demand higher and will likely provide high-cost producers the incentive to cut back on production. USD200bn of capex cuts have announced across the oil and gas sector, which will help the market come closer to balance as we move toward year-end and into 2016.”

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