It's investing 101: a strong dollar means weak commodities. But if you take the next level coursework, it includes chapters on the China slowdown and emerging market currencies heavily weighted towards commodities. The outcome of a strong dollar and a weaker China might be worse for gold.
A strong dollar will be an obstacle to energy and materials sector stocks, but the direction of China’s economy is likely to be at least as influential, says
"We think these more China-global growth-sensitive asset prices may already be pricing in too negative a growth outcome in the coming quarters, so further selling of materials and energy sector equities into dollar strength may not be an especially attractive strategy," he wrote in a note to clients on Thursday.
Commodity currencies like the Russian ruble have finally caught up with the popping of the commodities bubble roughly three years ago as measured by the decline in gold. One of the better ways to see the combined effects of Fed policy and China’s growth on risk assets in recent years is to compare the trends in commodity prices and commodity-linked currencies.
Until 2009, commodity prices and commodity-linked currencies behaved virtually like the same asset – the main exception was the surge in FX carry trades into high yielding currencies like Brazil, which made that Brazilian real gain against the dollar. During the recovery, the performances of commodity prices and commodity-linked currencies diverged markedly, until recently. Commodity prices have remained weak –- a function of oversupply and persistently weak global growth, including China’s structural slowing since mid-2011. For much of this time, commodity-linked currencies have performed far better than commodity prices would suggest.
This outperformance partly reflects the direct effect of the weaker dollar, or what some in emerging markets referred to as the "currency war". Now, a weak China and a shift in expectations about dollar momentum have seen commodity-linked currencies start catching up with commodity price drops. For Barclays, both face downside pressures from here if growth outside the U.S. remains tepid. But "it is no longer obvious that selling commodity-linked currencies provides better risk-reward than selling commodities outright," says McCormick. "Given the jump in gold prices during the market risk aversion in recent weeks, we see selling gold as a natural candidate in a broader long U.S. dollar strategy."
