OUTLOOK 2023 The commodity super cycle spurred In addition, an end of the Ukraine- more vulnerable as the strong by China’s hyper-growth rate in the Russia conflict could help extract dollar weakens demand. Emerging beginning of the century has waned some of the uncertainty embedded in markets with dollar-denominated significantly [Fig. 12]. As China’s agricultural, oil, and an assortment sovereign debt and corporate debt leadership has focused on containing of metal commodities that have been tend to struggle to service the debt COVID-19 at all costs, the once strong whipsawed by the ongoing warfare. as the dollar strength intensifies. economy has stagnated. Additionally, Japan has suffered through the the boom in real estate projects has CURRENCIES—THE END U.S. rate cycle, watching the yen fall slowed dramatically as developers are OF KING DOLLAR? to nearly defenseless levels against mired in debt. To say the U.S. dollar has vaulted the dollar. Much of this is due to Analysts are continually debating higher during the Fed’s rate hike the Bank of Japan’s insistence on when—and if—Xi will ease zero- cycle would be an understatement. keeping the yield on the Japanese COVID-19 lockdown regulations Whether it is the result of the interest 10-year bond in an extremely low and introduce compelling stimulus rate differential (that is, that the and tight range as it adheres to a measures to support the economy, a Fed has been more aggressive than policy called Yield Curve Control scenario in which commodity pricing other central banks) or that U.S. (YCC). Rather than raising rates, could recover substantially. markets have been attracting more the world’s third largest economy Generally, important contributing investments from foreign investors, has kept rates steady via YCC, but factors to support commodity prices the result has been staggering. has been forced to intervene in are the end of the interest rate cycle The strong dollar, while making currency markets to raise the yen by central banks, particularly the Fed, imports less expensive, has put against the dollar. Until the Fed or which in turn, could weaken the dollar pressure on many of the large markets make it clear that the rate and help foster global economic multinational companies with a hike cycle is nearing an end, the yen strength. Moreover, when China’s global footprint, particularly as global will continue to be subject to bouts economic backdrop begins to recover economies are facing slower growth. of extreme vulnerability as long from the current malaise, the signals Also, many emerging markets as YCC remains in place. However, for commodity prices to recover that export commodities and/ the weaker yen can help Japanese should be in place. or import basic commodities are companies compete against U.S. companies in the competitive export market. Commodities index vs. With China, the world’s second largest economy, also not raising fig. China GDP growth rate interest rates as its economy BLOOMBERG COMMODITY CHINA GDP CONSTANT PRICE languishes, the Chinese yuan has INDEX (CUMULATIVE YoY) been hovering at lower levels 250 20 against the dollar. Concerns over regulatory policies, transparency, 12 200 15 and what actions the Xi regime will take to strengthen the economy 10 have culminated in many questions 150 rather than answers. 5 As the Fed moves toward its 100 final interest rate hike, a path that 0 could take many months, the dollar should lose some of its seemingly 50 -5 relentless force and fall to levels that are commensurate with offering 0 2001 2006 2011 2016 2022-10 stability to global markets, but also helping U.S. companies compete for Source: LPL Research, Indexes are unmanaged and cannot be invested into directly. business internationally. Bloomberg 11/15/22 Past performance is not a guarantee of future results. 14