The recent rout in crude oil prices and that of a number of other key commodities could have some surprising ramifications for the forex markets next year.
The obvious victims so far have been the commodity currencies, some of which have been hammered. If commodity prices are entering a long-term bear market that could have significant ramifications for monetary policy in the United States, UK, Eurozone, Japan and other developed countries.
The common great preoccupation for central bankers across developed economies right now is deflation. It's a cause for concern to varying degrees from the U.S. Federal Reserve through to the Bank of Japan. A commodities bear market will certainly increase deflationary pressures in the absence of strong wage growth, which remains subdued even in the relatively fast growing U.S. and UK economies.
Meanwhile, there's speculation that the Riksbank may have to go beyond keeping interest rates low and even consider measures such as quantitative easing due to deflationary pressures in Sweden. The implication is that QE could be launched despite the absence of a crisis and with a respectable GDP growth rate – 2.1% in Q3 and unemployment at 7.5% (both streets ahead of the Eurozone).
That same dynamic could potentially play out in the UK and to a lesser extent in the United States, where some inflationary pressures have been more evident recently. In the US CPI is around 1.8%
In the UK CPI it is 1.3% with the Bank of England expecting it to fall to below 1% in the next six months. UK growth and inflation are being negatively impacted by the struggling Eurozone across the channel.
USD/CAD shows example of commodity currencies suffering set-backs