Beijing: If you’re in the business of poking holes in the reflation trade, this may be an opportunity.

While they’ve driven gains in 2017, currencies of commodity-led nations such as Australia, South Africa and Brazil are struggling to regain the momentum they enjoyed before Donald Trump’s election sparked a year-end reversal. This could foreshadow an element of doubt in the global recovery as they are often seen as barometers for world growth given their countries’ reliance on international trade. That’s especially so given signs the rally in commodity prices is close to exhaustion and poised for a pullback.

“If the dollar rallies commodities will sell off,” said Tim Condon, head of research in Asia at ING Bank NV in Singapore. Details on the US president’s planned tax overhaul could revive demand for the dollar, he said. “That’s a huge headwind for commodities.”

After jumping to a seven-month high earlier this month, the Bloomberg Commodity Index has been in retreat. At the same time, a custom gauge of currencies from nine resources-linked nations — Australia, Brazil, Canada, Chile, Indonesia, New Zealand, Norway, Russia and South Africa — is holding below a trend channel drawn from the January 2016 trough along levels before the US election.

Falling back

Evidence mounts that commodities may be turning.

Copper is falling from a 21-month high despite supply interruptions at the world’s two biggest mines, US crude is struggling to reach the psychologically important $55-a-barrel level after its end-2016 surge — as speculation mounts that output cuts won’t do enough to end a global glut — and agricultural commodities from wheat to soybeans have all pulled back from this year’s peaks. Gold has largely stagnated since hitting a three-month high on Feb. 8.

There are some who expect that commodity currencies will regain momentum, and that’s because they trust that global growth will be strong enough to reinvigorate demand for raw materials.

“The rally in commodity currencies is quite sustainable,” Jun Kato, who helps manage about $8.9 billion at Shinkin Asset Management Co. in Tokyo. “The general trend is for a global economic recovery and for inflation to accelerate gradually. In that kind of environment, commodity prices are expected to be strong for a while.”

Australia’s dollar is the biggest gainer among major currencies this year, climbing 6.7 per cent. It has been followed by rallies of more than 5 per cent in the South African rand and Brazil’s real. The Aussie’s advance has stalled since Feb. 8 despite gains in the price of iron ore, Australia’s top export earner, which reached its highest since August 2014 on Monday at the port in Qingdao, China.

That commodity, too, could be at a make-or-break point. BHP Billiton Ltd., the world’s biggest mining company, has flagged the potential for the market to come under pressure, while Fortescue Metals Group Ltd., the fourth-largest exporter of the steelmaking material, is forecasting a moderation in prices. Macquarie Group Ltd. is warning of steep losses.

This chart shows the Aussie and Chinese iron ore futures are both within a so-called ascending wedge formation, which is typically followed by a retracement lower.

The Aussie retreated Thursday after data showed capital expenditure dropped more than forecast. The currency has edged down from Feb. 16, when it was at its strongest since US election day, and analysts are predicting declines. According to the median of forecasters’ estimates compiled by Bloomberg, the Aussie will drop about 3.7 per cent by the end of this quarter.

“If iron ore prices swung the other way, or if there was some sort of crash and burn, that layer of support would be taken away and the trade-weighted Australian dollar would be vulnerable to the downside,” said Viraj Patel, a currency strategist at ING Groep NV in London.

Stocks, too, are flashing a warning, with shares of raw materials and energy producers leading losses globally the past five days, after driving the 20 per cent world equity rally over the past year. The short-term moving average line for the MSCI All-Country raw materials stock index fell below the signal line at the start of February, indicating momentum favours declines.