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Copper Update: The Dollar Did It!

By Jim Williams

Copper prices fell to the lowest level in almost three weeks on Tuesday, as a broadly stronger U.S. dollar dampened the appeal of the red metal. The losses were limited by signs of potentially stronger demand and expectations of further policy easing by top consumer China.

Investors are hoping Chinese demand will recover in the second half of the year. The next key Chinese indicator will be the HSBC preliminary reading of the country’s manufacturing sector, due out on Thursday, and investors will be keeping an eye out to see whether recent stimulus efforts have shored up economic activity.

The U.S. dollar index was up almost 1 percent, moving off last week’s four-month low. A stronger dollar reduces demand for raw materials (like copper) as an alternative investment and makes dollar-priced commodities more expensive for holders of other currencies.

Reports on building permits and housing starts are due this week as investors look for new indications on the strength of the economy. Market players are also waiting for the release of the minutes from the Federal Reserve’s April meeting. Those are expected on Wednesday. That, plus U.S. inflation data expected to be released on Friday should provide further clues on the timing of an expected U.S. rate increase. Recent reports indicate the economy has slowed since the start of 2015, prompting many experts to push back expectations on the timing of an initial rate hike by the Fed.

Weakness in both the U.S. and Chinese economies has kept a lid on copper prices.

“Eventually, the demand situation in China will improve in the second half and the U.S. dollar may have more downside risk given the sluggish U.S. economy,” said Helen Lau, analyst at Argonaut Securities in Hong Kong, who sees copper recovering to $6,614 in July-December.

“The grade of copper ore is also declining in a lot of mines and that will reduce supply.”

Chinese copper consumption may rise more than 5 percent from a year ago in the second half, compared to up to 4 percent expected for the first half, said Yang Changhua, senior analyst at state-backed research firm Antaike and industry executives.

Three-month copper on the London Metal Exchange was off 0.8 percent at $6,328 a ton by after hitting a two-week low of $6,318. Copper has been trading in narrow ranges since hitting $6,481 on May 5 amid weak Chinese demand. China’s copper imports dropped 4.4 percent in April from a year ago.

The dollar rose as the euro took a hit on worries that Greece may miss debt repayments next month, making dollar-denominated commodities more costly for holders of other currencies.

Four months into negotiations and still no Greek deal
As mentioned above, the dollar is stronger because of the lack of a financial deal in Greece. The country’s labor minister says that Athens will soon conclude an agreement with its foreign creditors. “There’s a deadline, which is June 5,” he said – the date on which Greece’s next repayment to the IMF is due. “We all know that if there is no solution, let’s say until then, in relation to funding, things will be difficult.”

 

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