Yuan Provide Copper Psychological Bounce
Fundamentals
The Copper market got a reprieve from selling pressure yesterday as a result of the Chinese decision to allow the Yuan’s exchange rate to strengthen. There is a perception that the move would put the industrial giant at a slight disadvantage from an export standpoint, which could bolster the domestic manufacturing sectors for Western nations. Also, it would make the import of rate materials less expensive, which could test inventories of commodities, such as base metals, grains and petroleum. Despite these bullish factors, it still appears as though Chinese imports of Copper are set to decline. The housing market has come under assault by the bureaucrats in Beijing, who have imposed laws to cool off the housing sector. The struggles facing the Euro zone have not been in focus the way they have been at the beginning of the month, but there is much skepticism as to whether enough has been done to avert long term damage. These lingering doubts are very much in the back of traders’ minds and can quickly temper any sort of enthusiasm. The hear no evil, see no evil, speak no evil approach doomed many traders just a year and a half ago when the markets imploded. Unless material evidence materializes showing that the governments of Europe and the European banking sector are on solid footing, the bounce could be temporary.
Trading Ideas
The Chinese decision to raise the Yuan’s exchange rate can be seen as a temporary psychological boost, but may do very little to improve fundamentals in the near-term. Technically, the charts seem to favor the downside, if only to test the 2.75 level. For these reasons, traders may wish to short the September Copper contract at 2.95 with a protective stop at 3.05 and a downside objective of 2.75. The trade risks around $2,500 for a potential profit of $5,000.
Technicals
The continuation chart for the Copper contract shows prices failing to hold the recently rally above the 3.00 level. On the downside, the 2.75 mark ac be seen as a critical level. If the market is able to hold here, prices could stabilize and trade range bound. If, on the other hand, prices come down and violate the 2.75 level, the downtrend that started in April could continue. The momentum indicator is showing bearish divergence from price and RSI, hinting at further downside potential.
Robert Kurzatkowski Trading Specialist
