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Copper Correction After Chinese Holiday


By Jim Williams

All is back to normal this week. Well, as normal as can be for copper. After a weeklong Chinese holiday, the roller coaster ride that is copper is back up and running.

After a positive start to the week, a corrective retreat in oil prices and a stronger dollar pushed copper prices slightly lower.

This comes a day after metal prices gained support from a renewed strengthening in oil prices on hopes that Russia would reach an agreement to restrict output. President Vladimir Putin is on record supporting a coordinated cut with OPEC. As of this morning, oil prices are holding the $50 level.

The dollar is the key contributor to copper prices this week. The U.S. currency hit a two-month high above 97.50 on a trade-weighted basis. The stronger dollar played an important role in undermining copper prices on Tuesday. Dollar trends will be important in the short term with markets also on alert for the latest Chinese lending data, which will provide significant evidence on likely near-term Chinese demand.

A stronger dollar makes commodities priced in the greenback more expensive for buyers paying with other currencies. But as China’s economic activity ramps up after a week off, demand is expected to strengthen into year-end.

“We have shifted from copper bears to modest bulls on better signs of real demand in China and a looming slowdown in supply growth,” said UBS in a report.

“A stronger dollar presents problems for the U.S. economy,” says tED contributor Andrew Hecht of Seeking Alpha. “As the dollar rallies, U.S. goods become less competitive on the world stage, and profits for U.S. companies suffer.

“Additionally, if the dollar rallies to the 100 level before the Fed hikes interest rates, the Fed runs the risk of fueling the currency even higher. A rally in the dollar between now and the December FOMC meeting could mean that the Fed will have one more excuse not to act in 2016,” adds Hecht.

We should see what hand the Fed is holding later today. The Federal Reserve is scheduled to release minutes from its September meeting this afternoon. It is expected the Fed will skip any rate action at the November meeting with the presidential election a week later.

Hecht believes there is an increasing probability that the Fed will not pull the trigger in December either.

We will wait and see with the rest of the global economy.

Economy Reports Out of China
China’s economy showed positive changes in the third quarter and the country’s debt risks are under control, Premier Li Keqiang said in a speech in Macau on Tuesday.

Part of those positive changes is China’s efforts to combat rising property prices. A number of Chinese cities – most notably, Beijing – announced new restrictions on purchases and mortgage down payments early this month. New home construction is a key factor in the price of copper.

Any negative sentiments were calmed by signs of a mending economy and hopes that efforts to curb property purchases may only have limited impact on overall copper demand.

 

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