09-11-2015, 11:14 PM
- Nov 9 2015 at 3:56 PM
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[img=620x0]http://www.afr.com/content/dam/images/g/j/o/h/m/6/image.related.afrArticleLead.620x350.gku2ux.png/1447050965537.jpg[/img]Commodities companies will be watching the US Federal Reserve's December rate decision like hawks - hoping for doves. AP
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by Vesna Poljak
Commodities face more pain ahead if the United States Federal Reserve lifts interest rates next month for the first time in almost a decade.
The hike, which markets now estimate to be around a 70 per cent chance of going ahead, is bullish for the US dollar and could point to further appreciation of the greenback in 2016. That means iron ore, copper and oil are less affordable for buyers who trade with other currencies.
After a better than expected outcome for US employment data on Friday, commodities sold-off as anticipation of a rise in interest rates before the end of 2015 grew. On Monday, ASX-listed miners followed suit. Iron ore was down 1 per cent to $US48.21 a tonne and Brent crude oil declined 1.17 per cent to $US47.42 a barrel.
BHP Billiton declined 3.7 per cent to $21.86; Rio Tinto declined 2.5 per cent to $49.53; Woodside Petroleum was down 2.1 per cent to $29.36 and Origin Energy lost 5 per cent to $5.13.
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"The correlation between the dollar and commodity prices has stood the test of time this year," said Ray Attrill, National Australia Bank's global co-head of foreign exchange strategy. "If you are a non-US dollar based buyer of commodities, it costs you more."
Slowing activity in China and downgrades to global growth have been bad news for commodity prices in 2015. The supply side of the equation has been slow to respond to changing demand dynamics, exacerbating the collapse in prices.
What strategists and economists have to figure out is how much of the Fed's likely December rate hike is "priced in" to the value of the US dollar? That won't be clear until the Fed's December 15-16 meeting is concluded because market reaction will be dictated by Fed chair Janet Yellen's statement and the Fed's new forecasts for future rate hikes.
With that in mind, commodities will be counting on the Fed to deliver with a dovish bias. But any improvement in US economic data between now and then might call for a more hawkish central bank as markets head into the new year.
"What sort of Fed tightening are we getting in December? One view is this will be the most dovish tightening in US history," said NAB's Mr Attrill. "It's not inconceivable that the dollar goes down if the Fed hikes."
Alternatively, "The other risk is you could argue they should say the economy looks strong enough to withstand a full blown tightening cycle. On that basis, it's reasonable to think the ascendancy of the US dollar continues."
Since Friday, the US dollar rallied against almost every currency; the Australian dollarwas fetching US70.53¢ on Monday afternoon.
As the prospects of a Fed hike dipped and rose over the past 12 months, foreign exchange markets tended to reflect more optimism than rates markets of the Fed's ability to lift rates off the zero bound (the range between zero per cent and 0.25 per cent).
However for Asian economies and the Australian dollar, there is another variable at play. Any further devaluation of China's yuan could mean the rest of the region follows China's currency lower.
"That link from China to the broader emerging markets currency universe to Australia is seen to be alive and kicking," Mr Attrill said. "To some extent, the Fed and the dollar is a little bit incidental."