Copper prices last week hit an all-time record high at $5.24/lb. Normally, that would be a reason for markets to cheer. But the unusual and uncertain circumstances have caused another traditional indicator to provide a worrying signal. The question is, what happens now?
The quick explanation for copper’s rise has been tariffs. Specifically, last week the Trump Administration threatened to slap 25% levies on imports of the metal. But copper had been rising even before that, scoring 30% gains since the start of the year. Part of that was due to stockpiling ahead of the expected tariffs. But there are other reasons that are more directly related to forex.
Dr Copper Losing Status
Traditionally, copper prices have had a strong correlation with economic strength. This has led to the moniker “Dr Copper” as rising prices have meant that the economy is strong, while a drop in prices indicated a pending slowdown or outright recession.
Copper is an ubiquitous metal in industry and services, being used in construction, electrical transportation, EVs, space applications and is a key component even of the new AI chips. So, if the economy is going strong, then there will be a natural increase in the demand for copper. BNP Paribas, for example, expects demand for the metal to rise 2.3% this year, in line with global economic growth forecasts.
The Spike and the Worry
BNP argues that the fundamentals of the market have largely remained unchanged, and that copper prices will crash in the second quarter once tariffs are implemented. They argue that importers have been stockpiling ahead of expected taxes, and will then have to run down their inventories, hurting demand.
This has been a phenomenon in many areas where Trump has threatened tariffs, from aluminium all the way to cars. In fact, this sudden rise in the US trade deficit has led to predictions that the US first quarter GDP figure will be negative. But, once the tariffs are applied, then that increased demand would likely reverse, contributing to a drop in imports, and therefore a reversal in the dollar.
The Dollar, Commodity Currencies and the Euro
Instead of predicting economic activity, it seems that this time around Dr Copper is predicting a reversal of trends. That means the recent gains in commodity currencies could reverse as the dollar gains strength in the aftermath of the actual application of the tariffs. For now, traders have been selling dollars ahead of the potential impact of the trade war. Once the tariffs are in place, traders will have more certainty in allocating their funds.
This could go beyond just the commodity currencies, as the Euro has been rising on both internal and external factors. The expected increase in government spending has pushed up yields, but that could be months or even years before it actually becomes effective. In the meantime, tariffs being applied to exports while the cost of raw materials is elevated could compress the shared economy. That might cause the recent upward trend in the Euro to reverse, particularly if US yields start to rise at a similar rate to Europe’s.
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