The Hindu Business Line

Metals and dollar move in tandem

Hope of economic growth under Trump presidency spurs rare trend


One of the fundamenta­l dynamics of the commoditie­s markets is being turned upside down, thanks in part to Donald Trump.

Industrial metals prices and the dollar are rising in tandem on expectatio­ns that US economic growth and inflation will accelerate during Trump’s presidency. Usually, they move in the opposite direction as the dollar’s strength makes commoditie­s, which are mostly denominate­d in the currency, more expensive for buyers outside the US.

The trend is so rare that it’s only happened a handful of times in the past decade. It is one of the many reasons that mining companies such as Glencore Plc are rebounding.

“Post-election, we’ve seen markets rotate away from defensive investment­s, seeking growth,” Tom Price, a metals analyst at Morgan Stanley in London, said by phone. “The US dollar’s lifted, and so has demand for dollar-priced assets like commoditie­s.”

The Federal Reserve said on Wednesday that inflation expectatio­ns have tightened and conditions in the labour market are strengthen­ing. US President-elect Trump has pledged to enact growth-fuelling tax cuts and infrastruc­ture spending after being sworn into office.

Another factor: Chinese investors are buying dollarpric­ed commoditie­s like copper and zinc as a hedge against yuan depreciati­on, strengthen­ing the correlatio­n between metal prices and the dollar, JPMorgan Chase & Co analysts said in a December 2 note.

Metals-dollar link

The LMEX Index of metals jumped 12 per cent in November, the biggest gain in six years, and prices have fallen slightly this month.

Metals broadly declined on Friday, with copper sliding 1 per cent in London to $5,671 a tonne.

By comparison, the Bloomberg Dollar Spot Index added 3.9 per cent last month, reaching the highest level in more than a decade.

The 30-day correlatio­n coefficien­t between the two indexes is 0.29. In July, it was negative 0.6.

The dollar’s strength translates to weakness in currencies such as the Chilean peso and South Africa rand, reducing the cost of labour and power for miners. At the same time, they earn dollars for the products they sell.

Futures on the metal have soared 74 per cent this year, notching the biggest gain in the Bloomberg Commodity Index. At the same time, mining companies are seeing expenses plummet due to costsaving measures and currency weakness.

Improved profitabil­ity would normally encourage miners to reach for their shovels, but it takes time to begin operations and several large zinc mines were closed last year. Glencore has pledged not to restart mothballed mines until it’s confident that more supply won’t drive down prices.

Zinc’s supply shortage will support prices if Trump’s economic policies disappoint or Chinese regulators restrict speculatio­n in metals markets, Molly Shutt, an analyst at BMI Capital in New York, said by phone.“Right now, there’s so much frenzied excitement around zinc, and it probably has a bit further to run,” Shutt said.

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