Goldman Says Commodities May ‘Cushion’ Blow From Rates for EM FX


While a surge in U.S. Treasury yields has put pressure on exchange rates across emerging markets, this year’s rally in commodity prices may offer some protection, according to Goldman Sachs Group Inc.

Currencies from commodity-dependent emerging markets still have room to catch up with exuberance in oil and copper prices, London-based strategist Ian Tomb said in a note Friday. These volatile moments in the rates market may be an opportunity for investors to go long on high-quality, pro-cyclical bets from the South African rand to the Mexican peso and Russian ruble.

“Commodity price increases may be large enough to imply that, despite rising core yields, commodity-sensitive EM currencies have underperformed in 2021,” Tomb wrote in a note. “Large increases in commodity prices in recent months may help cushion the blow of higher core yields.”

Goldman Says Commodities May ‘Cushion’ Blow From Rates for EM FX

Rallies in copper and oil prices are particularity prescient to exporter economies across the developing world, with the metal trading just off its highest prices in a decade and crude at levels last seen before the coronavirus was declared a pandemic. The Bloomberg Commodity index climbed to its highest level since 2018 this week.

Still, emerging-market currencies are poised for their worst week in five months, led by losses in Turkey’s lira, Brazil’s real and the South African rand. This leaves money managers to weigh the risks of rising U.S. yields against prospects for a sharp, stimulus-fueled recovery out of the pandemic, which is boosting demand for the commodities.

For Goldman Sachs, some of the most interesting opportunities are for emerging-market currencies with a sensitivity to copper, such as the South African rand and Chilean peso. The Russian ruble and Colombian peso, meantime, benefit the most from an oil price rally, even as the overall sensitivity of emerging market currencies to crude has declined in recent years, the firm said.

©2021 Bloomberg L.P.

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