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TALKING POINTS – AUD/USD, NZD/USD, EMERGING MARKETS, RESOURCE NATIONALISM

  • Resource nationalism is on the rise amid firming global growth
  • Emerging markets vulnerable, face further risk of capital outflow
  • Australian and New Zealand Dollars may suffer amid uncertainty

Check out our Q4 forecasts to learn what will drive key asset price movements through year-end!

COMMODITY PRICE RISE FUELS RESOURCE NATIONALISM

The rise in global growth – after suffering in the shadow of the 2008 Great Recession – has triggered the rise in resource nationalism. It is the process in which states exert greater control over their natural resources. This frequently occurs as demand for inputs rises, which in turn fuels price gains.

Private investors – particularly those overseas – are frequently elbowed out or have to incur a higher cost in order gain access. These often come in the form of having to pay higher royalties for the extracted resources.

The rise in commodity prices has driven a wedge between investors and the state’s strategic interests.

Local politicians – out of a desire to boost their political clout – are imposing higher regulatory costs and diverting profits away from foreign shareholders to distribute them locally. There have also been threats of expropriation without compensation, particularly from the South African government.

Mining companies all over the world have cited resource nationalism and political risk via government intervention as the biggest obstacle to further investment. Companies are less likely to invest in a country where the regulatory terrain is constantly changing, and often to their disadvantage.

EMERGING MARKET ASSETS UNDER PRESSURE

Resource nationalism has been resurfacing in emerging markets, particularly in Sub-Saharan Africa. The Tanzanian government earlier this year implemented new regulatory measures on gold that required foreign-owned mining companies to provide shares to local firms and the state.

In Zambia, raw and refined copper combined account for 80% of all their exports. The government is planning to increase mining taxes and raise the royalties by 1.5%. The current range is between 4-6%. The Global X Copper Miners ETF has been falling this year from rising political risk associated with resource nationalism.

The Democratic Republic of the Congo (DRC) – which happens to be the largest exporter of cobalt – has undertaken a similar set of measures. The government put forward a new mining code that increased royalties from 2% to 3.5%. Glencore, the largest producer of cobalt, has had their stock tumble this year as uncertainty ravages the market. They also faced legal challenges from the DRC.

Resource nationalism and trade wars negatively affecting commodities

Glencore Stock, Global X Copper Miners ETF, Silver Futures - Daily Chart

Resource nationalism is also seen in Asia. In the Philippines, President Rodrigo Duerte has threatened miners he would “tax [miners] to death”. There is also concern that Indonesia and Mexico may follow a comparable set of policies.

AUSSIE, KIWI DOLLARS AT RISK AMID MARKET TURMOIL

The rise of this kind of resource-oriented protectionism is yet another among a multitude of factors that are weighing down emerging markets. The raging trade wars fueled by the recent surge in US-led protectionism and the strengthening US Dollar – the latter a function of an increasingly hawkish Federal Reserve – have been the primary forces driving global risk aversion.

Many developing countries have their debt denominated in the Greenback. This has made it more difficult for governments in emerging markets to pay back their debt, especially against the backdrop of a global slowdown. Cycle-sensitive assets like the Australian and New Zealand Dollar have also been on a steady decline since the beginning of the year.As risk appetite continues to fade among investors, the Aussie, Kiwi, emerging markets and other growth-anchored assets are likely to suffer.

Risk-sensitive assets decline as global risk increases

Emerging Markets, Australian Dollar, New Zealand Dollar - Daily Chart

TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter