Are Rate Hikes Coming? Does it Matter?

#Currencies and #FX are notoriously difficult to predict because they do not exist in a vacuum, one #currency affects all others. That said, I'm cautious that #interestrate hikes are coming and that this will put some #bearish pressure on the #commodity #markets.

As a #coffeemarket analyst, there's three factors here we need to consider:

1) will the #federalreserve raise interest rates?

2) will that appreciate the #USDollar?

3) will this put #bearish pressure on #commodities and #coffee?

My answer to all 3 is...probably yes. However, there is a lot of uncertainty around all of them.

Let's consider 1 first. Few salient points here:

A) The #federalreserve has indicated that they can't keep rates low forever and that #inflation concerns would suggest that they have to raise rates at some point.

B) The Fed has telegraphed in their last meeting minutes that rates would rise if #economicindicators continue to improve.

C) Economic indicators seem to be bullish the US #economy (PMI, Personal Income and Expenditures, GDP, and anecdotal evidence of labor supply being tight)

D) For the last few weeks, and again today to the Financial Times , St. Louis Fed President Bullard said that he was going to be advocating raising rates because the US "jobs market is tighter than it looks."

E) US has turned the corner on Vaccinations with new infections at 7% of the highs and more than 50% of the population receiving at least 1 dose and 41% full vaccinated.

F) Even if all of the above are true, worth noting that it is highly unlikely that US will just raise rates in June. More likely, they will signal that they are beginning to make a plan for raising rates.

Which brings us to Point 2:

If the Fed raises rates, or suggests that they will, what impact will this have on the $DXY?

St. Louis Fed President Bullard

The immediate reaction would likely be a rise in the $DXY, but then this will have to be balanced against all of the other economies in the world as well. I believe that the US would likely lead the pack with a combination of brute force in their monetary policy and the sizeable lead that they have in the Vaccine numbers over most countries.

Point #3:

If the USD does appreciate, this will undoubtedly have an impact on Commodities. We have seen Commodities and Coffee both rise with the fall of the dollar, and the opposite will also be true.

coffee and commodities rising with the fall of the dollar

What remains to be seen is whether the fundamentals of coffee are strong enough shine through and overpower this on their own. My feeling is that a commodity flush will trigger a washout in recent spec positions but that this market will be hard to keep down.

Rumor is that the Brazilian farmer is bullish and not selling. That's a lot of pressure off of the market. Moreover, there should be a lot of Roasters and Specs who have missed out on the rally and are looking for opportunities to get long.