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Charu Chanana
Chief Investment Strategist
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Copper rally to pause after best month in over two years
Trade View 5 minutes to read
Short Term / Sell
Ole Hansen
Head of Commodity Strategy
Summary: High grade copper was a star performer this past month on the back of tightening supply and optimism on several Chinese fronts. However, this could be an opportune time to hit the pause button.
Instrument: HGK9 or COPPERUSMAY19
Price Target: $2.820/lb
Market Price: $2.960/lb
Background:
Just like other industrial metals high grade copper has experienced a strong beginning to 2019. Following seven months of range-bound trading, the price surged higher during February en route to record its best month since December 2017. Tightening supply and optimism surrounding a trade deal between the US and China, together with recent tax and interest rate cuts in China, and a stronger CNY, have all helped support the recovery.
While we maintain an overall constructive view on copper due to tightening supply more than increased demand, we also see signs of a market in need of a correction. The RSI has moved into overbought territory and with a lot of good news on trade now being discounted the risk of a disappointment has risen. Either from the trade talks or from weaker than expected macroeconomic data from the world’s three biggest copper consuming regions.
Supporting the rally has been a recent decline in copper stocks held at London Metal Exchange-monitored warehouses. While this has created a sense of tight supply, we have simultaneously seen a strong increase in deliverable stocks at the Shanghai Futures Exchange.
The US government shutdown between December and January resulted in a delay in the reporting of speculative positions held by hedge funds. While the CFTC is expected to have cleared the backlog and be “live” again from March 5, the latest available data covers the week to February 12. It shows that hedge funds during a four-week period from January 15 had cut a near record short to almost neutral. Buying is expected to have continued since then with funds now holding a net-long.
While we maintain an overall constructive view on copper due to tightening supply more than increased demand, we also see signs of a market in need of a correction. The RSI has moved into overbought territory and with a lot of good news on trade now being discounted the risk of a disappointment has risen. Either from the trade talks or from weaker than expected macroeconomic data from the world’s three biggest copper consuming regions.
Supporting the rally has been a recent decline in copper stocks held at London Metal Exchange-monitored warehouses. While this has created a sense of tight supply, we have simultaneously seen a strong increase in deliverable stocks at the Shanghai Futures Exchange.
The US government shutdown between December and January resulted in a delay in the reporting of speculative positions held by hedge funds. While the CFTC is expected to have cleared the backlog and be “live” again from March 5, the latest available data covers the week to February 12. It shows that hedge funds during a four-week period from January 15 had cut a near record short to almost neutral. Buying is expected to have continued since then with funds now holding a net-long.
Parameters:
Entry: Sell at current price around $2.965
Stop: $3.025/lb (1.5 ATR)
Target: $2.82/lb (3.6 ATR)
Time Horizon: 1 – 2 weeks.
Management And Risk Description:
Selling copper at this stage is going against the current trend, hence our relatively conservative price targets. We have chosen to place the stop above at $3.025/lb which is just above the 61.8% retracement of the June to August sell-off last year. We choose to take profit just above $2.815/lb, which represents a 38.2% retracement of the run up since early January. Besides the potential announcement of a trade deal the risk to this trade's success will also depend on the above-mentioned daily stock reports from the London Metal Exchange.
With the trade parameters laid out we do not plan to update this trade recommendation on a regularly basis.
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