High Metal Prices or Exchange Rate; Not Both

The inverse correlation between the US dollar and US dollar commodity prices is frequently ignored as an influence on metal prices. Feasibility studies sometimes assume simultaneously rising prices and currency. The chart illustrates the relationship using the IMF metal price index (in red) and the US dollar trade weighted exchange rate (in blue). Turning points in the series are conspicuously close over the entire 35 years. Since December 2011, the IMF metal price index has fallen 38% while the currency has risen 23%. A coincident rise in metal prices and exchange rate is unprecedented and, consequently, highly unlikely. Analytically, breaking the nexus would require an acceleration in global output growth strong enough to overpower the negative currency effect. A broadly based acceleration in growth would require Japan and Europe to engage and would probably come with appreciating non-US currencies. For metal prices to be rising while the US currency is also going up, US growth alone would have to be strong enough to rebalance commodity markets while the rest of the world floundered. Unlikely.