By Jim Williams
Copper prices tumbled to two-week lows on Tuesday, closing at $2.04/lb. Investors blame falling equity prices as one of the contributing factors on the market and for the global economy in general. Volumes have been slowed a little this week thanks to the New Year’s holiday in China.
tED contributor and economic analyst for Forbes, Jesse Colombo, says he is waiting for the bubble to burst one way or the other on a couple of key factors when it comes to copper. The first is the actual price. “Copper is still trading in a range between its $2/lb support and $2.20/lb resistance,” states Colombo (see chart below). “One of these levels needs to be broken decisively to confirm the next major move. The commercial hedgers (“smart money”) are still long while the large traders (“dumb money”) are still short, which decreases the odds of short-term downside until the situation reverts again.”
Copper did manage some slight momentum last week thanks to disappointing economic data causing a weakening of the U.S. dollar. The weak data has some investors wondering if the Federal Reserve will hold off on further interest rate hikes in the short term.
That leads us to Colombo’s other ‘bubble’ that needs to make up its mind – the dollar. “I’m still watching the U.S. Dollar Index for cues on copper’s next move,” says Colombo. “The dollar’s latest weakness has helped to support copper somewhat, but there is still upside risk for the dollar due to the risk of a Chinese yuan devaluation and the next phase of the emerging markets crisis that I expect. The dollar is still trading in a range between roughly 95 and 100; one of these levels needs to be broken to confirm the dollar’s next move, which should influence copper in an inverse manner.”
Colombo says he is still bearish on China due to its credit and property bubble, but he believes that the ongoing unfolding of this bubble is a major downside risk for copper. “I wouldn’t be surprised to see copper hit its lows of early 2009 or even overshoot lower, but I want to reevaluate the situation if it gets to those ’09 lows first,” concludes Colombo.
China started its week-long Lunar New Year holiday on Monday. “We’ll have to wait and see what happens when it comes back,” said Vivienne Lloyd, an analyst with Macquarie Group. “We’re waiting for production reports from the miners, which should be interesting.”
Mining giant Glencore is scheduled to release its metals output on Thursday.
We hope the holiday lull in China will turn things around for the red metal in 2016. We will keep an eye on the dollar, equities, economic data, the impact of the Chinese New Year, Glencore and much more over the next week.
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