Copper short squeeze fades ahead of key resistance

Global inventories of key industrial metals held in warehouses watched by the major exchanges in London and Shanghai remain historically low, potentially a bullish price signal once major central banks begin their, for now, delayed rate hike cycle. Lower interest rates may boost an overdue recycling phase as it lowers the opportunity cost of holding inventories. In a recent analysis Goldman Sachs calculated that gold and copper would get the largest immediate boost from Fed easing.

In addition, lower US interest rates may support a weakening of the dollar, thereby lowering the cost of dollar-priced commodities in local currencies. Note, some of the strength this week across commodities, including industrial metals, has been driven by the first week of broad dollar weakness since December with the general risk appetite receiving a boost following a bumper result from Nvidia, the AI titan. 

Overall, copper remains rangebound with the mentioned China growth concerns being offset by speculation that the Chinese government will have to do more to support an ailing economy, and not least the prospect for a tightening market outlook as the green transformation continues to gather momentum and miners cut their production forecasts as they face harder-to-mine deposits, rising costs, water restrictions and increased scrutiny of new permits.

The bounce this past week has been amplified by short covering from wrong-footed hedge funds who during a two-week period to February 13 – when HG copper fell 5.25% - increased their net short futures position by 39,000 contracts (442k Metric Tonnes) to a four-year high at 42,000 contracts.