Supply glut and global slowdown hamper commodity currencies - AUD, BRL, CAD & NZD among the major susceptible crosses

The pressure remians during 2016 among commodity driven currencies - iron ore for AUD and BRL, copper for CLP, dairy for NZD - supply growth in 2016 will be below the peak rates of the past few years but still too strong to tighten market balances when China demand is so weak.

As per the estimates global iron ore supply to grow at 1.6% versus 0.7% in 2015, and copper production to expand at 1.8% versus 0.7% in 2015. But even these below-trend pace shouldn't be sufficient to lift prices given that China's industrial cycle explains over half the variation in these prices, such that every 1% change in Chinese industrial production growth is worth about 7-10% moves in prices.

The global economy is currently not doing very well. 2015 was one of the worst years in the century. The only time the economy was worse was during the previous two recessions - one at the beginning of the 21st century and the other during the global financial crisis. 2016 is likely to be as bad as there is a global slowdown, with countries like Brazil and Russia in recession.

The deficiency in global demand will inevitable affect China, and due to weak global demand, China's exports will be affected which will weaken the economy, thus India has been the only bright spot among BRIC nations. Though there are no structural problems, there are problems of global demand. Europe is stagnating, while the US is growing slowly.

Thus we expect 2016 to be a year of price divergences across commodity sectors by which the price of oil and natural gas rise but after hitting $25 a barrel, while copper to slip further (end-2016 target of $4000/tonne) and those of iron ore remain depressed but range-bound around current levels ($45/tonne).

The obvious currency implications are within the commodity bloc, where currencies of oil exporters (CAD, MXN, RUB, NOK, MYR, COP) should outperform currencies of non-oil commodity producers (AUD, NZD, CLP, ZAR), but one should still be selective within each of these categories. For example within the oil export bloc, RUB is probably the most compelling in H1 since it has the highest carry (+10%) and strongest current account position (forecast 4.9% in 2016).