FX Watch El Niño and commodity FX
Group Economics Macro & Financial Markets Research Georgette Boele +31 20 6297789 Roy Teo +65 6597 8616
4 June 2015
The chance of an El Niño weather event is high, but it will likely be a weak to moderate one. If an El Niño shock were to occur, some regions will experience deviations from their normal weather patterns. This can have material effects on their economy. Policymakers are likely to respond should these effects endanger their policy targets. The central banks of Australia and New Zealand are likely step up monetary policy easing and this will weigh on the Australian dollar and New Zealand dollar. The South African rand is unlikely to be sold off aggressively because of a vigilant central bank. However, Latin American currencies will probably benefit because of higher interest rates and stronger growth. El Niño weather phenomenon attracting attention…
Box 1:
The possibility of an El Niño weather phenomenon (see box 1)
El Niño explained
occurring this year has attracted attention. This is because if
El Niño is a natural phenomenon caused by unusually warm
an El Nino shock were to occur, the impact on some
ocean temperatures in the Equatorial Pacific, that leads to
economies and commodity prices (especially agricultural
significant deviations from normal weather patterns. In
prices) could be significant.
particular, El Niño can lead to a disturbance in rainfall patterns. The lead time between measured unusual water temperatures
El Niño Summer
and disturbed weather patterns can be as long as one year.
Blue = wet, orange = dry and red = warm
Among these consequences is increased rainfall across the southern tier of the US and in Peru, which has caused destructive flooding, and drought in the West Pacific, sometimes associated with devastating bush fires in Australia. Observations of conditions in the tropical Pacific are considered essential for the prediction of short term (a few months to 1 year) climate variations. El Niño can be seen in measurements of the sea surface temperature Source: National Oceanic and Atmospheric Administration (NOAA)
Chance of El Niño occurrence is high, but a weak to moderate one… Source: NOAA
According to US NOAA Climate Prediction Center there is an approximately 90% chance that el Niño will continue through
El Niño Winter Blue = wet, orange = dry and red = warm
Northern Hemisphere summer 2015, and a greater than 80% chance it will last through the end of 2015. By early May 2015, weak to moderate El Niño conditions were reflected by aboveaverage sea surface temperatures across the equatorial Pacific. What is the impact of El Niño shock on real GDP and inflation? According to an IMF Working Paper, Fair Weather or Foul? The Macroeconomic Effects of El Niño, April 2015, an El Niño event has a significant effect on real GDP growth for most countries in the sample (the countries below including Argentina, Malaysia, Philippines and Saudi Arabia). While
Source: NOAA
Australia, Chile, Indonesia, India, Japan, New Zealand and South Africa face a short-lived fall in economic activity following an El Niño weather shock, the US, Europe and China eventually benefit from such a climatological change.