Is the inflation trade really a “crowded” trade? Well a number of commentators are leading us to believe that this is the case. However, inflation really depends on where in the world you are sitting/living/being paid and having to pay…….i.e. it is a currency “thing”. What is good for the goose (e.g. Americans) many not necessarily be so good for the gander (say Australians). That is, what may be inflationary to Americans may not be inflationary to Australians…….if commodity prices are rising in USD terms but falling in Aussie dollar terms. We think that right now inflation from a global perspective is still a localized phenomenon (actually it is not us thinking but the market telling us). Yes commodity prices are rising in USD, EUR, JPY, CHF, GBP, & CAD terms but they are not doing so AUD, NZD, BRL, and ZAR terms. It is not until (if) commodity prices have experienced an extended period of strength against all other paper currencies that will we conclude that the commodity/inflation trade is a crowded one.
The graph below gives the performance of the Goldman Sachs Commodity ETF in Aussie dollar terms. Yes it appears that the Aussie is now struggling to outperform and given the behavior of the Rate of Change indicator, the next big move is likely to be to the upside.
Yes we know that the Goldman Sachs index is heavily weighted in favor of energy (something like 70%) but even so look at the performance of a more broad based index like the Rogers International Commodity index…..more specifically look carefully at the behaivor of the Rate of Change indicator. It is rather suggestive of an immanent bullish breakout!
So here we go again………the inflationary path is opening up before our very eyes, but it is taking its time about it. Does this ultimately mean that that we are in for an ultra long period of inflation, that is, commodities being the strongest currency in the world? We would like to think so but of course the market cares little for what we think……..let the market be your ultimate guide!
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