Yuan strength drives copper to a two-year high

Commodities 5 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  Copper has following a short-lived correction resumed its ascent and today reached the highest level in more than two years. The rally has despite softening fundamentals, been supported by a stronger Yuan and supply disruptions at mining operations in Chile. The longer-term outlook remains supportive as the green electrification agenda gathers momentum.


What is our trading focus?

HG Copper - COPPERUSDEC20
COPA:xlon - WisdomTree Copper ETC (UCITS eligible)

____________________________________________________________________________________________________

Copper has following a short-lived correction resumed its ascent and today reached the highest level in more than two years. While precious metals led by gold continue to look for drivers to ignite some fresh life into a stalled rally, HG copper has swiftly returned to break above the September high at $3.1210/lb.

Recent and current developments supporting copper:

  • Strong Chinese demand and global monetary stimulus
  • Lundin Mining suspending operations at mine in Chile due to strike actions
  • The Yuan rally which has taken it to the highest since July 2018 against the dollar
  • Stimulus negotiations in Washington

Longer-term developments:

  • A Covid-19 vaccine fuelling a Western demand recovery
  • A sizable deficit next year as the green electrification agenda gathers momentum
  • A weaker dollar and rising demand for reflation hedges.

Source: Saxo Group

The latest leg in copper’s rally has been driven by a surge in China’s yuan to the highest since July 2018. As the metal rally buyers in the worlds largest commodity consuming nation can afford to pay a higher price. A rising interest rate differential between the dollar and yuan together with China’s continued recovery from their Q1 virus outbreak may continue to support this trend beyond the U.S. election in two weeks time.

It is however interesting to note that the latest rally has occurred despite rising fundamental headwinds. Inventories at exchange-monitored warehouses, especially those controlled by the London Metal Exchange, has recovered to 183,000 tons from a recent fifteen-year low at just 73,500 tons. This development has seen the spot versus the 3-month spread on LME rise to the biggest contango since June, a sign that the market remains well supplied.

Speculators meanwhile returned as buyers of HG copper following what turned out to be a shallow 9% correction in early October. In the week to October 13, the net-long jumped by 15% to 80.5k lots, not far from the late September peak at 87.3k lots which was the highest since early 2018. 

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.