Dollar strength likely to return and weigh on prices

It was a more positive week for prices, in large part owing to some softness in the US dollar. Otherwise, the news was not particularly positive for prices given the ECB’s surprise decision to hike its policy rate by 50bp (having signalled 25bp), persistent upheaval in China’s property sector and economic data showing clear signs of a downturn in most Western economies. As it happens, we think that the dollar will strengthen again in the coming weeks given that the Fed faces fewer constraints on its monetary policy than the ECB (upward pressure on periphery spreads and uncertain energy supply) and is likely to hike rates aggressively, as soon as next week. This will put downward pressure on “risky” assets like commodities. That said, supply of most industrial commodities is still highly constrained and stocks are low, which should at least limit the downside for prices.