In the short term, the dollar remains a key driver, and apart from the Chinese renminbi and AUD gaining strength as China reopens, the Japanese yen has also seen strong gains, with the Bank of Japan’s upcoming meeting on January 18 shaping up to be a major risk event.
The recent news flow and rumor mill anticipate the Bank of Japan announcing further tweaks to its yield-cap policies. This comes at a time when Japanese 10-year bonds continue to test the 0.50% upper limit of the permitted trading band. A widening of the band would allow a further narrowing of yield spreads between (rising) Japanese and (falling) US yields, thereby supporting further JPY strength, and commodity supportive dollar weakness.
There is no doubt that US inflation has peaked, partly aided by lower commodity prices in recent months. A key question for 2023 remains its ability to return all the way back towards 2.5% – a level currently being priced in as the medium and long-term target.
Russia’s attempt to stifle a sovereign nation and the western world's push back against Putin’s aggression remains a sad and unresolved situation that continues to cause havoc across global supply chains of key commodities – from crude oil, fuel and gas to industrial metals and key crops.
The introduction of an EU embargo on Russian fuel products from next month may trigger a bigger disruption than the oil embargo that was implemented last month. Europe will have to look elsewhere for its diesel and gasoline while Russia may struggle to find buyers prepared to buy its products. With Europe increasingly showing signs of narrowly avoiding a recession and with Chinese demand for fuel products expected to rise, the prospect for higher oil prices later in the year remains.
Copper, the star performer on China reopening hopes
Copper has led a strong start to 2023 for industrial metal prices on hopes of a potential surge in demand from China, the world’s top consumer. This is buoyed by the reopening of China’s economy and increased policy support to fuel an economic recovery to offset the economic fallout from President Xi’s failed and now abruptly abandoned zero-Covid policies. This optimism has been mixing with a weaker dollar on speculation that the Federal Reserve is slowing down the pace of future rate hikes as the inflation outlook continues to moderate.
The VanEck Global Mining UCITS ETF – which includes titans like BHP, Rio Tinto, Glencore, Vale and Freeport-McMoRan – trades up 10.5% so far this month, a nine-month high. Glencore makes around 40% of its revenue from copper, while BHP makes 26.7% and Rio makes 11%. In addition, the iron ore futures traded in Singapore have cleared $125 per ton for the first time in six months in anticipation of a strong seasonal pick-up in demand following the Lunar New Year holiday.
The initial and strong rally in copper has primarily been driven by technical and speculative traders expecting demand from China to underpin prices in the coming months. Once the initial move is over, the hard work begins, with an underlying rise in physical demand needed to sustain the rally. During this phase some profit taking may emerge, giving potential buyers another opportunity to get involved.
Copper, up close to 10% this month, trades near a seven-month high with the latest run up occurring when the price broke above the 200-day moving average, now support at $3.8350 per pound. Since then, momentum and technical buying has seen the HG copper contract break several resistance points, the latest being $4.0850 per pound, the 50% retracement of the 2022 sell-off. Before seeing the next extension – potentially towards $4.31 per pound – the metal may need to cool off, allowing for a retracement lower towards the $4 per pound area.