Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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Copper, a potential casualty of further dollar strength
Ole Hansen
Head of Commodity Strategy
Summary: Copper's impressive recovery from the March low, has paused on a combination of slowing momentum and signs of weakening fundamentals. The steep uptrend from the March low is currently being challenged with additional dollar strength the potential trigger for a deeper correction
What is our trading focus?
HG Copper - COPPERUSDEC20
COPA:xlon - WisdomTree Copper ETC (UCITS eligible)
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Copper’s impressive recovery and momentum from the March low, has started to slow with the price struggling to extend its impressive gains beyond 3.10/lb on High Grade copper (COPPERUSDEC20). The rally seen across industrial metals, not least copper, in recent months has been driven by a post-pandemic recovery in Chinese demand supported by credit and scattered supply mine disruptions.
While the fundamental outlook remains supportive, the lack of fresh upward catalysts may now pose a short-term challenge to this poster-child of momentum. Something that has helped attract a substantial amount of speculative long positions from trend following strategies that many hedge funds and CTA’s adhere to.
Copper is currently challenging the uptrend from the March low, but in our opinion the price would have to break below $2.95/lb before it kicks off a correction/consolidation phase. Just like gold’s current correction has more to do with dollar strength than changed fundamentals, an extended period of dollar strength could be the trigger that for now could pause this classic momentum trade.
A key source of inspiration behind the rally has been the continued slump in stocks at warehouses monitored by the three major futures exchanges in New York, London and Shanghai. Not least the drop to a 14-year low in stocks monitored by the London Metal Exchange has supported the market. The tightness that it signaled drove the spot premium over the three-month benchmark to an 18-month high at $40/t last week before easing lower to $28/t yesterday.
During the past week stock levels have stabilized on LME while levels monitored by the SHFE has seen a steady rise since late June. This development combined with softer prices in Shanghai may potentially have shut the arbitrage window for profitably importing copper into China.
The reason why copper risks a non-fundamental supported correction can be found in the weekly Commitments of Traders report. The mention strong momentum has continued to attract an ever increasing net-long position held by speculators such as hedge funds and CTA. Given that many of these positions are purely based on technical analysis a break below $2.95/lb could trigger a correction.
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