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.
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FX Watch - El Niño and commodity FX - 4 June 2015
El Niño shock on real GDP
result, it is likely that they will fall further than currently is reflected in our current currency forecasts.
In %
2.0
El Niño shock on inflation and real GDP 1.0
In %
2.0
0.0 1.0
-1.0 0.0
-2.0 ID SA NZ AU IN JP US CN KR BR EU CL CA SG MX TH Impact
After 4 quarters
-1.0 -2.0
Source: IMF April 2015
ID SA NZ AU IN JP US CN KR BR EU CL CA SG MX TH
In addition, most countries experience short-run inflationary pressures following an El Niño episode (see graph below).
GDP after 4 quarters
Inflation after 4 quarters
Source: IMF April 2015
…however the SARB will unlikely ease …
El Niño shock on inflation
Despite weak economic growth in South Africa, inflationary
In %
pressures persist. It is likely that the South African Reserve
1.5
Bank (SARB) will hike interest rates at their next meeting. In 1.0
the occurrence of an el Niño shock, the drop in economic growth will unlikely result in rate cuts because inflationary
0.5
pressures remain because of upward pressure in power costs. 0.0
Therefore, the central bank will probably continue their current vigilant stance. This will continue to have a negative effect on
-0.5
economic growth.
-1.0 NZ CA SG AU EU SA JP CN US CL KR TH IN ID BR MX Impact
After 4 quarters
Source: IMF April 2015
During the Fed tapering dry-run, the rand belonged to the group of fragile five currencies that weakened sharply when financial markets upward adjusted Fed rate expectations. This year, we expect another wave of US dollar strength based on
What does this mean for our outlook of commodity
expectations of higher US rates and yields. However, we
currencies?
expect the rand to be more resilient than in the past. Granted
If an el Niño shock were to occur and its effects are in line with
the South African current account deficit remains substantial at
the above mentioned IMF study, what does this mean for our
5% of GDP (see graph below). Therefore, the rand remains
outlook of commodity currencies? This can only be determined
vulnerable to changes in investor sentiment. However, the
by combining the impact on GDP and the impact on inflation,
current account deficit is on an improving trend. Moreover, a
because they will be crucial for setting monetary policy (see
small portion of debt is foreign denominated and foreign
graph below) and the direction in the currency.
reserves position are stable at comfortable levels. This will increase the resilience of the rand. In addition, it is likely that a
More monetary policy easing in a number of countries…
vigilant central bank will gain market confidence despite weak
It is likely that the central banks in Australia and New Zealand
economic growth. Last but not least, the rand is massively
will ease more aggressively this year and/or have a longer
undervalued. So the occurrence of an El Niño shock wills
easing cycle to support their economies in case of an el Niño
unlikely result in a change of our USD/ZAR forecasts.
shock. Adverse weather effects will affect food and agricultural output in both countries and weigh on growth. The impact on
…while other central banks could become more restrictive
the New Zealand economy will be more substantial. Therefore,
Even though an El Niño shock will probably bring higher
the central bank may ease more aggressively. The prospect of
economic growth in Brazil, Mexico, Chile (according to this IMF
a weaker economy and more monetary policy easing (because
study), it will also bring higher inflationary pressures. The
of low inflation pressures) will add further pressure on the
combination of higher growth and inflation, may push interest
Australian dollar and the New Zealand dollar in our view. As a
rates in Brazil higher. However, monetary policy is already
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FX Watch - El Ni単o and commodity FX - 4 June 2015
very restrictive and we judge that most of the hiking cycle is behind us. For Mexico and Chile, a combination of higher growth and higher inflation could trigger an earlier start of a hiking cycle. A combination of higher growth and higher official rates should be supportive for the Brazilian real, Chilean peso and Mexican peso. However, they will unlikely outperform the US dollar as we expect the US Federal Reserves to hike more aggressively than currently is reflected in prices.
Our commodity currency forecasts
AUD/USD NZD/USD USD/CAD USD/NOK USD/IDR USD/RUB USD/ZAR USD/BRL USD/MXN USD/CLP
04-Jun 0.7745 0.7151 1.2443 7.7199 13,281 54.87 12.33 3.13 15.53 628
Q2 2015 0.78 0.73 1.23 7.50 13,200 53 12.00 3.05 15.25 630
Q3 2015 0.73 0.69 1.27 8.25 13,500 52 12.20 3.25 15.50 630
Q4 2015 0.72 0.68 1.30 8.00 13,700 50 12.20 3.20 15.50 630
Source: ABN AMRO Group Economics
Q1 2016 0.70 0.66 1.31 7.62 13,800 48 12.20 3.20 15.25 635
Q2 2016 0.68 0.65 1.33 7.38 13,900 47 12.20 3.10 15.25 640
Q3 2016 0.67 0.64 1.34 6.82 14,000 46 12.20 3.10 15.00 645
Q4 2016 0.66 0.64 1.35 6.52 14,100 45 12.20 3.10 15.00 650
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FX Watch - El Niﾃｱo and commodity FX - 4 June 2015
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