The US dollar will now be the major driver for commodity prices after last week’s rather blatant move by the US Federal Reserve to return a rate rise to centre stage.
While an increase is possible at next month’s Fed meeting, the July and September meetings look more likely candidates.
For that reason the US dollar will reverse its recent weakness and start rising – and will put downward pressure on commodity prices.
The only exception will be the vote on June 23 about UK membership of the EU. A vote to leave would see a sell-off in sterling, a surge in the greenback and also gold.
A vote to remain in the EU will see markets quickly focus on the July meeting of the Fed for a rate rise (if there is no increase at the June meeting a week before the EU vote in Britain).
The AMP’s chief economist Dr Shane Oliver says the Fed will not move in June because of the Brexit vote in the UK, leaving July as the most logical month for the second rate rise in a year. But from then on, the increases won’t come thick and fast.
“Fed hikes will be very gradual with constrained global growth and the risk that the $US will start to surge higher again creating renewed weakness in commodity prices, Renminbi deprecation, pressure on emerging countries and a brake on US growth all acting to constrain by how much and how quickly the Fed can hike,” Dr Oliver wrote at the weekend.
For the Aussie dollar it means more time around current levels of 72 to 73 US cents, which would please the RBA.
That will also depend on the quality of Australian economic data, starting this week with the March quarter figures on construction work and private investment and then the March quarter GDP data next week, along with early figure for April for building approvals, trade and retail sales.
The Aussie dollar closed around 72.20 at the weekend, but dipped below 72 US cents to around 71.90 in a 10 week low. The dollar is down 6.5% or 5 US cents in the past month and will dip under 72 US cents if the data for Australia is weak in the next month.
The July 2 election won’t have an impact, unless there is a change of government.
US oil futures rose more than 3% last week because of production problems in Africa and Canada were seen as helping ease the pressure from the current oil glut. Those fears outweighed the impact of the Fed’s rate rise signalling.
June West Texas Intermediate crude futures settled at $US47.75 a barrel in New York early Saturday, down 0.9% for the day. The June contract, which expired at the settlement, rose 3.3% for the week.
And in London July Brent crude the global oil benchmark shed 2 cents to $US48.79, for a weekly gain of about 2%.
The weekly rig use report from Baker Hughes Friday showed no change in the number of rigs drilling for oil in the US and a small drop in the number of gas rigs. It was the first week in the past nine that there had been no change in the number of oil rigs in use.
US oil stocks edged higher and production eased a touch last week, but if there’s no change in rig use in the next couple of weeks, the market will become twitchy.
The stronger greenback hit gold futures which fell on Friday for the second straight weekly loss, as those growing expectations for a US interest rates rise pushed prices to the lowest level since late April.
Comex June gold fell by $US1.90, or 0.2%, to settle at $US1,252.90 an ounce, the lowest settlement since April 27. For the week, prices fell 1.6%. That was after a fall of 1.7% the week before.
Comex July silver added 3.9 cents, or 0.2%, to $US16.532 an ounce on Friday. But that was not enough to help the metal which saw a loss of 3.5%.
And Comex July copper fell about half a cent, or 0.3%, to $US2.056 a pound on Friday, down 0.9% for the week and pressures by the stronger dollar.
And the spot price of iron ore closed at $US54.89 a tonne on Friday, up 2.7% on the day, but lower over the week.
