With the unheard-of levels of monetary and fiscal support in the last year due to the COVID relief programmes, it is no surprise that the credit impulse 12-month average is running at levels last seen with the announcement of the final round of QE in 2017.

However, what goes up must come down, and as inflation has crept into the market, we see scenarios where Central Banks are looking at tightening monetary policy. As China is the world’s largest user of industrial metals, its credit impulse has a direct impact on a country like South Africa, which relies heavily on commodities for economic growth and job creation.

Looking at the graph below, we can see how China’s credit impulse (blue line) has turned negative:


The graph represents the Industrial / Precious Metals ratio against China’s credit impulse. Aluminium, copper, nickel, and zinc are among the industrial metals included in the Industrial Metal Index. These metals are primarily used in the manufacturing and production sectors.

China is the world’s largest user of industrial metals for manufacturing, and with credit impulse as a leading indicator of manufacturing, the demand for industrial metals could fall. If this should happen, we believe that the ratio between industrial metals and precious metals will narrow. We believe the reason for the ratio closing would be a lower demand for industrial metals; on the one hand, and investors running to safe havens such as Gold and other precious metals on the other hand.

The economic impact of a slowing credit cycle cannot be understated – the slower the cycle becomes, the more we (South Africa) are heading for an economic slowdown.

Based on recent performance, we should expect the USD to strengthen during periods of low credit impulse, putting pressure on emerging markets currencies as the market rushes for USD cash and a liquidity squeeze ensues.