No matter what Federal Reserve policy makers decide on Thursday, commodity investors should brace for volatility.
Speculators cut their combined net-long positions across 18 commodities in six of the past eight weeks and are now holding the fewest bets since June, U.S. government data show. That may leave them vulnerable to price swings.
Volatility will increase as “a result of how positions were before the meeting, and not because of the rate itself," said Tim Evans, an energy analyst at Citi Futures Perspective in New York.
Interest rates have remained between zero and 0.25 percentage points since the 2008 financial crisis. Traders are pricing in a 30 percent chance that the Fed will raise the rate when the board meets on Thursday. Odds for such a move by December grow to 59 percent, according to futures data compiled by Bloomberg.
Here’s a breakdown of how commodities might be affected:
- The Bloomberg Dollar Spot Index, already up about 15 percent in the past year, probably would strengthen further. That’s usually bad news for oil, Bart Melek, the head of commodity strategy at TD Securities in Toronto, said by telephone, simply by making it more expensive in other currencies.
- For commodity producers in Brazil, the biggest coffee, sugar and iron-ore exporter, and Russia, which ships nickel and wheat, declining currencies have lowered labor costs and provided incentive for producers to ramp up exports that fetch dollars in return. Coffee fell to a 19-month low last week as a plunging real spurred speculation Brazil will step up output.
- Higher interest rates would increase the cost of credit next year, squeezing margins for farmers already pinched by low grain prices. “If we start to see substantial rate increases over time, then we will see much more of an impact,” said Jim Farrell, who heads Farmers National Company in Omaha, Nebraska.
- Gold bulls, too, are typically apprehensive of dollar strength. Bullion is trading near one-month lows, while global holdings in exchange-traded funds backed by the metal are near the lowest since 2009. Banks including Oversea-Chinese Banking Corp. expect prices to stay weak.
- Industrial metals are faring a little better than gold in the final countdown to the Sept. 16-17 Fed meeting, after tensions surrounding slowing Chinese demand eased and miners deepened cutbacks.
- Oil explorers may also feel more pressure from higher borrowing costs. “It’ll be perceived negatively and some of the E&P names may get hurt, but the sector is already beat up because oil fell from $105 to $45,” said Gabriele Sorbara, an analyst at Topeka Capital Markets Inc. in New York.
- Among energy-related stocks valued for their dividend payouts, utilities are historically the most vulnerable to rate increases, according to Kit Konolige, senior utility analyst for Bloomberg Intelligence. Because their rates are government-regulated, utilities can’t easily raise prices to match higher interest rates with dividend increases.
- A rate increase would be unfortunate timing for the U.S. natural gas industry as it prepares to begin exports later this year. “The stronger the dollar, the more expensive it’s going to be for people to participate in the LNG space” as buyers pay more in local currencies, Bob Yawger, director of futures at Mizuho Securities USA Inc. in New York, said Sept. 11 by telephone.
“The Fed meeting is going to dictate the direction in commodity prices," said Walter “Bucky” Hellwig, who helps manage $17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama.