The uncertainty over the long-awaited US federal funds interest rate hike finally ended when the Federal Reserve raised rates by 25 basis points on December 14, 2016. Although the move was widely expected, we saw a broad-based sell-off in markets (XLB), which could be attributed to the hawkish tone on future rate increases.
According to the dot plot, the Fed sees three rate hikes next year, as compared to the previous dot plot, which plot implied two rate hikes for 2017.
Stronger US dollar
One possible repercussion of the rate hike could be the further appreciation of the US dollar. Commodity prices tend to have an inverse correlation with the US dollar. When the dollar gains, commodities tend to fall, and vice versa. The reasoning behind this relationship is straightforward. Since most commodities are priced in the US dollar, a strong dollar makes commodities relatively costlier in other currencies.
Copper is no different from other commodities that have a negative correlation to the US dollar. Further strengthening of the US dollar could negatively impact copper prices.
We should note that the earnings of copper producers such as Freeport-McMoRan (FCX), Teck Resources (TCK), and Rio Tinto (RIO) (TRQ) are sensitive to copper prices. Freeport’s fortunes are even more closely tied to copper prices because the company sold most of its energy assets.
Meanwhile, Freeport looks more prepared to cope with the rising interest rates than it was last year, when its net debt was ~$20 billion. That said, a rate hike could still impact the company. We’ll explore this further in the next article in the series.