Copper, like other dollar-denominated commodities, has a negative correlation with the US dollar (UUP). Simply put, a weaker US dollar makes commodities cheaper in other currencies. The US dollar traded weak in 2017. Among other factors, a weaker dollar supported copper prices. Copper miners, including Freeport-McMoRan (FCX), Glencore (GLEN-L), and Southern Copper (SCCO), followed copper higher in 2017. Let’s look now at the various bullish and bearish drivers for the greenback in 2018.
The passage of the tax reform bill has raised hopes of growth in the United States. The expected repatriation of overseas profits is another bullish driver for the US dollar. The Federal Reserve seems to be on track to continue its tightening cycle in 2018. Theoretically, these are bullish factors for the dollar in 2018.
There are some bearish drivers as well. For instance, we could see a higher budget deficit in the United States after the recently passed tax reform bill slashed the corporate tax rate. A higher US budget deficit is theoretically dollar-negative. While US growth is expected to be strong in 2018, we could see higher growth in other economies as well. As some observers have pointed out, since most of the overseas profits of US companies are dollar-denominated, we might not see a big demand for the US dollar as a result of repatriation by US companies.
Overall, most analysts seem bearish on the US dollar in 2018. If the greenback continues to trade weakly in 2018, it could act as a positive catalyst for commodities such as copper (BHP).
In the next part, we’ll see how some company-specific factors could impact Freeport in 2018.