Earlier this week, China announced export curbs on two key metals used in the chip and solar industries. The direct impact on foreign exchange markets wasn’t immediately evident, but typically trade and geopolitical issues tend to be reflected in the currencies. This latest escalation in the trade disputes between China, the US and Europe could, at the very least, have some implications for the commodity currencies.

What’s at stake?

The move by China to limit – not halt – exports of two key rare earth metals was characterized as using the “nuclear option” on trade. China is the main supplier of many elements that are vital to develop key high technology applications, such as computer chips and batteries for electric vehicles. Until recently, most countries were content to rely on production from China, which supplied the refined materials at a competitive price.

The over-reliance on a single exporter of certain materials has come under extreme scrutiny lately. The collapse of supply chains in the covid pandemic was a wake-up call for just how much the world relies on China. Russia’s invasion of Ukraine showed how such dependency can be exploited geostrategically. There is a strong move among major economies to “reshore” and “de-risk”, which leaves China in a very unfavorable position. Particularly given the domestic economic woes the Asian giant is experiencing. The yuan has generally continued to lose value over the last several months, reducing the cost of goods produced in China, and generally contributing to slowing global inflation.

Who are the winners?

With the threat of key commodities being cut off over trade disputes or geostrategic moves, many countries are likely to accelerate the diversification of their sources. That could be a boon for countries that have highly developed mining practices, and natural resources. UK companies have been snapping up lithium mines in West Africa, while Australian miners are buying up licenses in Argentina and Peru.

The development of these projects could generate cash flows into emerging markets, and push up their respective currencies. Australia, Canada and Mexico all have large areas that haven’t been explored for rare earth minerals simply because it was cheaper and easier to buy them from China. South Africa is already seen as a source for some of the rare earth metals. Norway recently discovered a large deposit of phosphates, potentially replacing imports from Russia and China – and boosting the Norwegian krone in the process.

The first step

By itself, the move to curb exports on a couple of metals from China is unlikely to have a major impact on the markets. But it’s an important move in the direction that could significantly shake up the commodity sector, which in turn could affect forex markets.

A major rare-earth find in Australia might eventually eclipse iron ore production in export value. That might be even more relevant to Canada, which could face dwindling returns from its main export, crude. As people become more and more worried about carbon emissions, the slow down in fossil fuel production might mean Canada’s main commodity export will have to change in the near future. And that will certainly affect the Canadian dollar.

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