Commodities to struggle as US dollar gains strength: Expert

In an exclusive interview to CNBC-TV18, Lennox says that since commodities are traded largely in the US dollar, any rise in the currency will limit upside price movements for commodities.

Post the jobs data that came out on Friday, commodities saw a sharp sell-off. Copper and Brent crude fell around 2.5% each because of the risk off that took place globally across financial markets.

Lennox says positive cues from Europe is the only trigger that can reverse the slide in the commodity market, but that there is a slim chance to see such news. “We cannot see any panaceas coming out of Europe that will give us confidence that Europe is in any way moving forward in terms of economic growth. So we do think that will be a concern for investors when they look at euro-US dollar value and the impact they will have on commodities,” he explained.

Talking specifically about crude, Lennox says weak demand from China, US and Europe will weigh on oil prices. From the precious metals space, Lennox says gold will hover around USD 1,600 per ounce levels.

Also read: Macro concerns may hit oil price this week

Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: How do you expect commodities to move in the near-term and what do you think are the triggers for commodities in general at this point?

A: We think one of the key triggers going forward will certainly be the direction of the US dollar. Commodities that are priced in US dollars do react when the dollar is rising and falling in value.

When you look at the US dollar and you look at its major trading currency, which is the euro, we do think that the potential is for the US dollar to probably continue to stay firm or perhaps rise. The only reason we can see the US dollar diminishing in value is if there is some good news coming out of the euro. So with a stronger US dollar, we do think that in the near-term commodities will struggle in terms of upside price movements.

Q: If one looks year on year, commodities have fallen over 20-22% and year-to-date as well they have fallen 7%. Equities on the other hand have been flat or up a few percentage points, so it’s a rank under performer. Do you see that continuing and specifically which commodities could be under attack?

A: We do think that that the Reuters CRB index will probably stay very volatile, certainly in the near-term and potentially for the rest of this year. We cannot see any panaceas coming out of Europe that will in fact give us confidence that Europe is in any way moving forward in terms of economic growth. So we do think that will be a concern for investors when they look at euro-US dollar value and the impact they will have on commodities.

We think the commodity that is probably most dangerous been the one that we have been quite supportive of for sometime and that is copper because it is a bellwether of economic activity. When you look globally, we see that the confidence in economic activity going forward is certainly on the down side. So I would like to think that the copper will remain supportive, but the pressure is growing for perhaps a little period of weakness for the copper price.

Q: For Brent crude, would you say the average for the quarter would be between USD 95-100 per barrel or does it go lower?

A: We do still think that the risk on for Brent pricing is actually still on the downside. When you look at the demand side for crude, the US still remains weak, the euro zone still remains weak and even China remains quite weak in terms of their demand for petroleum product. The OPEC nations are probably pumping in the range of 31.7 million barrels a day, so that to us would tend to suggest to us the risk to the downside.

We have had a couple of supply shock events that have probably given the price some support. What is happening in Norway in terms of petroleum workers and Iran uranium sanctions and embargos are now fully in place and we saw some tension there earlier in this week. So we do think that Brent will probably not trade higher, but probably be locked somewhere between the USD 90-95 per barrel region, a little below where we are probably trading at the moment.