EUR 155.78 For Business Accounts Only

022318 CGI FX & Commodities Outlook

The worldwide economy keeps expanding at its fastest rate since 2011, the largest sources of demand will continue to be from Asia. Recent research shows China and India alone will consume 30% of world energy production. For 2018 and 2019, we have Chinese growth to continue to grow at 6-7%.

Two weeks ago the World Bank has forecast prices to increase modestly in 2018 for almost all energy and non-energy commodities, with the exception of fertilizers, metals and minerals. The World Bank now sees Oil (WTI) to average $56/barrel in 2018, a 6% rise from $53/barrel in 2017, still significantly below our 2018 price target of $78 for WTI.

Continued supply restraint from producers in the Organization of the Petroleum Exporting Countries, coupled with falling crude inventories is expected to support higher oil prices. Agricultural commodities are on track for a modest increase after a sluggish 2017. Grain prices are expected to rise y-o-y by 2%, while production of edible oils (including soybean and palm oil) will rise by 5%.

The USD is starting 2018 on a weak footing, losing out against its stronger rivals day after day. But the USD would be even weaker if it weren’t for its status as a reserve currency. Reserve currencies like the Euro and Japanese Yen besides the USD, enjoy a buyer base that includes the world’s central banks, which stock up their own vaults with foreign reserves. The USD accounted for 63.5% of allocated reserves in Q4 of 2017, according to the IMF. In turn, this reserve status means that in times of a weak USD, such as now, central bankers are hoarding greenbacks for their reserves, which holds down volatility in the foreign exchange market.

For 2018, we continue seeing increasing downside pressures for the USD and are forecasting for the USD likely to weaken in Q1 from the current 88 levels to retest the 85 levels, and with risks to drop to 80 by the end of 2018. Our 2018 USD Index low price target is 80.

Various financial factors are supportive of the commodities market outlook in addition to a rise in world demand. Leading economies have yet to wind down favorable monetary policies and stimulus measures that remain in place from previous years of low growth. The ECB announced in December an extension to its quantitative easing program (which makes EUR 30BN in asset purchases per month) until September 2018. The continued USD weakness, which we forecast for all 2018 to continue towards USD 80 (DXY 80, down from current 89) also encourages commodity purchases, since most contracts are denominated in US currency. The strength of commodities markets will support the government revenues of many emerging economies, including Brazil and Russia. As the year progresses, investors will embrace climbing commodities prices as reinforcing an overall positive outlook for emerging market countries in the coming year.

Eurozone business activity continued to rise at a decent pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January. Price pressures and employment growth also remained elevated, though likewise saw rates of increase ease slightly. Business optimism about the coming year meanwhile ticked higher. The headline Markit Eurozone PMI fell from 58.8 in January to 57.5 in February, according to the flash estimate, which is based on approximately 85% of usual final replies. By country, growth in Germany came in at a three-month low, while in France the composite PMI moderated to the weakest for four months. However, in both cases the PMI readings remained at levels indicative of strong growth, close to recent seven-year highs.

Business activity growth meanwhile also slowed across the rest of the Eurozone, though still registered the second-largest expansion in nearly 12 years. The goods-producing sector continued to record a faster pace of expansion than the service sector, though growth of output and new orders slowed in both cases. However, both sectors continued to enjoy the best periods of expansion seen for seven years.