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China. The Dollar. Expected Interest Rate Hike.

China. The Dollar. Expected Interest Rate Hike.

By Jim Williams

Copper prices dropped slightly to close at $2.09 a pound at the closing bell Tuesday. The drop is significant because it all but wipes out the gains we saw for the red metal in the first quarter of 2016. The near-term outlook is not refreshing either – June is typically a week month for copper.

The latest drop in copper is being blamed on China, a stronger U.S. dollar and the anticipation of a rate increase by the Fed.

Activity in China’s manufacturing sector unexpectedly expanded for a third straight month in May but growth remained weak as orders softened, suggesting the world’s second-largest economy is still struggling to regain traction.

“Overall, China’s May PMI measures … were mixed, showing the challenges facing the economy. We expect the China government to continue to implement supportive measures to protect growth and ensure economic recovery,” Argonaut Securities said in a note.

‘Growth looks to be picking up’

Adding to the recent downward spiral for copper is a strong dollar and expectations that a better economic picture here in the U.S. could result in a rate hike when the Fed meets later this month.

Federal Reserve Chairwoman Janet Yellen talked about the U.S. economy on Friday at Harvard University. Ms. Yellen said, “Growth looks to be picking up,” and an interest-rate rise may come in a matter of “months,” as she expects the economy, and importantly, the jobs market, to continue to get better.

“It’s appropriate — and I have said this in the past–for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said, “and probably in the coming months such a move would be appropriate.”

While many think the hike won’t happen until July at the earliest, Ms. Yellen’s comments sent the markets spinning and the dollar shot higher as the markets closed for the extended Memorial Day weekend.

China’s manufacturing news took a little bit of the air out of the sails as the markets opened yesterday.

Other Related Copper News

Workers at Chinalco’s Toromocho mine in Peru started a four-day strike on Tuesday to demand the reinstatement of a quarterly bonus. Toromocho produced 31,407 tons of copper in the first quarter according to data from Peru’s Energy and Mines Ministry.

This latest strike news is just one piece of the puzzle that could impact the market as long-term prospects for copper will be boosted by supply reductions as copper producers curb supply due to low prices. In the near-term there is a possibility of supply related upside from labor disputes, which have been increasing in South America, a major copper producer.

For now, those keeping an eye on copper will have to contend with weak season demand, a high U.S. dollar and the anticipation of a rate hike by the Fed.

 

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