What's next for trade and supply chains?
At a Glance
The desk positions that ongoing supply chain disruptions will continue to impact global trade dynamics, particularly as economies rebound post-COVID, resulting in volatility in currency markets. Per the full note source, Richard Hayes of Nordea underscores that these challenges are not just recent, stemming from inherent issues predating the pandemic. This continued strain on supply chains signals potential trading opportunities in the FX markets, especially for currencies connected to commodity-driven economies that could see fluctuation in demand. With no immediate catalysts on the calendar, traders should remain focused on supply chain developments as a barometer for currency trends.
Key Takeaways
- 01Supply chain disruptions continue to influence global trade
- 02Economic recovery post-COVID may amplify currency volatility
- 03Traders should focus on supply chain news as a trading catalyst
Full Analysis
What the desk is arguing
The desk asserts that ongoing disruptions to supply chains are expected to affect global trade dynamics, leading to heightened market volatility in the foreign exchange sphere. This is highlighted by Richard Hayes from Nordea, who notes that while many focus on recent disruptions due to COVID, many of the issues are deeply rooted and systemic.
The backdrop provides essential data on economic recovery trajectories. For instance, as demand spikes post-pandemic, industries are struggling to deliver, which could distort pricing power across various currencies, emphasizing the need for adaptive trading strategies. Supply chain issues are projected to linger, thus affecting trade balances and currency valuations.
Where it sits in our coverage
Our consensus target for the EUR/USD currently sits at 1.075, within a range from 1.04 to 1.12, with noted forecasts from notable firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's call aligns closely with jpmorgan, suggesting that the complex interplay of supply issues and economic recovery could support appreciation of the euro against the dollar, contrasting with bofa which reflects a more conservative outlook.
How other firms see it
Aligned firms highlight a bullish outlook influenced by demand spikes affecting supply chains, creating pressure on currency pairs like EUR/USD. Meanwhile, contrary views from bofa propose that any recovery might be overshadowed by persistent supply constraints and geopolitical issues.
Monitoring related pairs such as AUD/USD remains crucial, particularly as commodity exports may be influenced by supply chain inefficiencies, reflecting broader market sentiments.
Market Implications
Traders should monitor the EUR/USD closely as it grapples with the fallout from ongoing supply chain issues, making a breach of the 1.075 level critical for understanding directional bias. Additionally, remain attentive to broader supply chain narratives which may impact commodity-driven currencies.
From the original
Podcast What's next for trade and supply chains? 30-11-2021 Challenges facing global supply chains and the knock on effects on trade have been making headlines around the world. As economies bounce back from a period of reduced activity, supply chains have been struggling to cope
Related speeches
4 itemsPodcast: Coronavirus and supply chains
The current commentary discusses the downstream economic impact of containment measures for COVID-19 on supply chains and corporate cash flows. Per the full note from Nordea, the ongoing disruptions stemming from the pandemic are expected to hinder corporate liquidity due to supply shortages and lost revenues. This disruption emphasizes the need for firms to secure financial contingency plans to mitigate the risks associated with prolonged supply chain interruptions, a sentiment that should resonate with institutional traders seeking to balance their portfolios amid uncertainty in the FX markets. Overall, a cautious approach is warranted as traders monitor post-pandemic recovery trajectories and subsequent central bank responses.
Global Commodities: Seeing the Invisible
The desk posits that persistent commodity tightness, particularly in natural gas and aluminum markets, underscores broader supply chain vulnerabilities resulting from geopolitical tensions, notably the closure of the Strait of Hormuz. Per the full note from J.P. Morgan, despite the implementation of a Memorandum of Understanding aimed at easing pressures, traders should remain wary of ongoing constraints that could disrupt pricing dynamics. This insight highlights the interconnectedness between energy commodities and foreign exchange movements, as any sustained price spike in these sectors could affect currency pairs like AUD/USD and CAD/USD, leveraging commodities' influential role on the broader economy.
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