European Credit Crunch Could Trigger Commodity Price Plunge
European banks have been cutting lending activities in order to improve their balance sheets. Since European banks are major players in the commodity trading industry, this ongoing credit crunch will have an impact on commodity prices.
In fact, the head of commodity trade finance at BNP Paribas predicted recently that lending to the commodities trading industry is set to drop by more than 25%. That happened back in 2008 during the credit crisis, and helped push commodity prices lower.
There are other signs the commodity market remains weak. Cargill, which is a big player in the commodity trading sector, said recently that it will have to cut its workforce in anticipation of weak business conditions. And copper is still trading below its 200 day moving average, which is a bad sign.
Going into next year, commodity currencies such as the South African rand, Australian dollar, and the Mexican peso will be on the top of my trading list. If the credit crunch in Europe intensifies, commodities will take on the chin. Shorting those currencies against the dollar will be a good way to profit from that.