Are Lumber Traders Currency Traders in Boots?

After a multi-month run up, U.S. random length lumber prices have pulled back in recent weeks. At the time of publication, the current CME May 2017 contract is hovering around $370 on low volume.

lumber-prices-may-2017

This move in lumber prices is almost the inverse of the U.S. Dollar exchange rate against other major trading partner currencies (see daily U.S. Dollar / Japanese Yen price chart below).

usdjpy-may-11-2017

What does this mean?

Around mid-April, as the U.S. Dollar strengthened against it’s counterparts, U.S. lumber prices softened. Or, another way to look at it… as foreign currencies weakened, the cost of imported products originating outside the U.S. decreased, bringing down the prices of commodity-like products in the U.S.

This effect of foreign exchange rates is greater when a product is like a commodity – it’s value lies primarily in its price, not characteristics unique to the product. A rare lumber specie, having unique attributes that is not easily substituted, is less effected by currency markets. That said, the bulk of lumber traded globally is commodity-like and significantly dependent on foreign exchange rates. To some extent, this makes currency traders out of lumber men and women.

After this recent near-term surge in the U.S. Dollar strength, the next several days could indicate which path markets take next. Two possible scenarios are:

  1. a continuation of the current short-term trend of U.S. Dollar strengthening, and U.S. lumber prices weakening; or,
  2. a reversal back to the medium-term trend of U.S. Dollar weakness, and U.S. lumber price strength.

Given recent statements by the Trump administration in favor of a weaker U.S. Dollar and lower-for-longer interest rates, and barring any extreme events in equity markets, we see a strong argument for scenario 2 over the medium to long-term: a weakening U.S. Dollar and higher-for-longer lumber prices. What remains to be seen, however, is if a weaker U.S. Dollar policy will truly be pursued by the administration considering it’s likely negative impact on U.S. equity markets.

Whichever scenario plays out, it remains important to keep an eye on those exchange rates, especially if making any trades in commodity-like forest products.

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