The China Syndrome
Fundamentals
Copper has been shining over recent sessions, despite floundering equity prices and negative construction data. Traders have largely discounted US housing and construction data in recent months, instead focusing almost exclusively on China. The outlook for the Chinese economy has turned much more positive in recent weeks, as evidenced by the Reserve Bank of Australia's decision to keep interest rates unchanged. The two countries have a very close trade relationship, with Australia acting as a key provider of raw materials that China uses. If the central bank did not believe that Chinese growth would turn back up, it would have likely taken more aggressive action by slashing rates, consistent with the consensus opinion. Premier Wen Jiaboa is expected to unveil a new stimulus package today, which is expected to aid the economic recovery. LME warehouse stocks of Copper, which climbed to nearly 550,000 tons recently, have fallen in recent sessions, indicating that demand finally may be picking up. Additionally, over 55,000 tons have been earmarked for delivery. It is too early to tell if the de-stocking at the LME is a real indication that demand is picking up or if the movement is the result of arbitrage and is being moved to Shanghai due to the higher price of the metal in China. While LME inventories remain high, Shanghai inventories are slightly below 29,000 tons, which is well below the average of nearly 50,000 tons over the past 5 years. If there is evidence that inventories are simply being shifted between the two exchanges to replenish inventories in Shanghai, it could be a letdown for bulls. The large speculative short position in the metal has certainly influenced trading since the beginning of the year. It has been a game of chicken between bears, who have been hesitant to add to their position, and bulls, who have been fearful of accumulating positions should the bears begin aggressively selling again. Meanwhile, shorter-term traders have taken advantage of the range-bound market, knowing that some shorts will be covering in the 1.40-1.45 range and possibly re-establishing positions between 1.60 and 1.65.
Technicals
The May Copper chart shows the market continuing to consolidate between 1.40 and 1.65. Prices are approaching the upper end of the channel, with traders closely watching how the market behaves. If prices are unable to break out above 1.65, the market is likely to remain range-bound. Momentum has remained flat, hugging the zero line the entire time the market has been consolidating. At the same time, the RSI indicator has been moving in lockstep with prices. When the market is finally able to break out of this tight range, one or both of these indicators may tip-off the move by diverging from prices or each other.
Rob Kurzatkowski, Senior Commodity Analyst
