Commodity markets have traded sideways in recent weeks, despite global equity markets edging higher. This is concerning given that the two asset classes have been very well correlated in recent months. The key driver of this divergence, in our view, is a resilient US dollar. Greenback strength tends to weigh particularly heavily on commodity markets, given that they are largely priced in the currency. Looking ahead, my colleagues here at Business Monitor expect both oil and copper to continue trading sideways and therefore, see room for this divergence between equities and commodities to persist a while longer. This divergence is well illustrated by the Dow Jones to CRB ratio, which has broken higher in recent trading.

While our general view is for further sideways trade in commodity markets, there are several more specific cases where fundamental and technical factors are aligning and allowing us to form some strong views. Nickel is a case in point.

We are bullish nickel on both a short and medium-term basis. The bullish fundamental case is centred on China, which faces a severe structural deficit of the metal. China consumes approximately 40% of the world’s annual nickel output, yet only accounts for around 18% of global nickel production. As a result, we expect China to remain reliant on significant volumes of nickel imports for several years yet. Moreover, nickel prices have broken higher in recent trading and present a very promising technical picture.

Not only do we see Nickel prices heading higher in the coming months, but we also see potential for them to outperform other base metals. This view can be quantified using the Nickel to London Metal Exchange ratio. The ratio has broken higher in recent trading, which suggests that the trend of nickel underperformance (that has persisted since early-2007) could be at an end. We expect that the ratio will head higher in the coming months as nickel continues to outperform the wider base metal complex.