Rhythmic Reasoning_Highlights_SWM_EN - Flipbook - Page 7
COMMODITIES & CURRENCIES
Oil to remain oversupplied, gold to hold its premium, copper prices supported
Gold continues to trade at a significant premium to fair value, a phenomenon seen in
previous periods of heightened uncertainty like Covid-19 and the GFC. Further upside
is possible if geopolitical/economic uncertainties rise or central banks increase the
pace of purchases rather than selling from their reserves.
Crude oil prices could move lower in 2026 amid excess supply
80
75
Brent ($/bbl)
Oil market fundamentals remain weak, but the latest geopolitical developments
associated with Russia–Ukraine are a significant wildcard. The Trump Administration’s
decision to impose secondary tariffs on India for Russian oil imports and Ukraine’s
escalation of attacks against Russian energy infrastructure in theory could flip the oil
market from oversupply to a shortfall. In our base case, we continue to forecast supply
will likely exceed demand by a fairly wide margin, even taking into consideration
potentially lower Russia oil production and export volumes, and thus we still believe
prices will average lower in 2026 versus 2025.
70
65
60
Despite heightened demand risks and geopolitical tensions, we continue to see strong
pricing support for copper given relatively low inventories and the impact of elevated
supply side under-performance. Between 2025-2029, we forecast prices to rise from
$4.35/lb to $5.00/lb. Given already low inventories and a tight structural market, we
see the potential for markedly higher prices sooner than we currently envision.
55
4Q25f
1Q26f
2025f
Scotiabank GBM
2026f
2027f
2028f
Strip
2029f
Consensus
USD may incur modest losses amid lower policy rates and moderating growth
In addition to the prospect of a significantly lower policy rate, we expect weak fiscal
policy settings to weigh on the USD outlook. Following the passage of President
Trump’s recent tax bill, work done by our Scotia Economics colleagues suggests that
the wider U.S. fiscal deficit alone (which may reach close to 7%/GDP over the next few
years under our base case assumption) likely means a 2.6–3.6% drop in the broad
value of the USD through 2026 and more losses in the medium term.
To some extent, the sharp fall in the USD suggests that a lot of the negative news may
be partially priced in. This may mean that the USD holds in a lower range over the next
few months until markets get a stronger sense of how much easing the Fed is likely to
undertake, as well as the extent to which tariff policy will dampen U.S. growth.
index
Recent labour market weakness has raised the risk of more aggressive rate cuts over
the balance of this year and into 2026. Pressure from the US administration for lower
interest rates has also weighed on USD sentiment and the White House’s
manoeuvring around the make-up of the FOMC has only added to market worries.
115
2.4%
110
2.0%
105
1.6%
100
1.2%
95
0.8%
90
0.4%
0.0%
85
21
22
DXY dollar index
23
24
25
US 2y OIS spread, DXY-weighted
%, spread
Narrowing of USD advantage is dollar-negative
An oversold USD strengthened as trade tensions eased, but our outlook remains
bearish as we anticipate moderate losses over the rest of 2025 and more weakness
through 2026 amid a litany of challenges facing the currency and the U.S. economy.
