China Switching to Expansionary Policies?
Tuesday, January 17, 2012
Copper futures have seen support from both strong electronic sales and the expectation that China will begin easing interest rates. European concerns are slowly losing their place in the forefront of traders' minds and inflation is once again a hot topic of discussion due to the sheer volume of cash thrown at economic problems. Turning to the chart, we see the March Copper contract breaking out of a wedge formation to the upside, suggesting that an upside breakout has taken place. The Copper market can be an extremely difficult market to trade due to its violent swings and illiquid options market. Traders can use Copper as a gauge to make trading decisions in more liquid markets. For those bold enough to test the waters of the Copper market, a possible strategy is to buy the March future on a close above 3.75 with an upside objective of 4.15 and a stop at 3.38.
Fundamentals
Copper futures are higher on the expectation that China will loosen its interest rates amid growth concerns. The metal is often seen as a barometer for the commodity market as a whole, which suggests that inflationary concerns may once again trump growth concerns over the longer term. This could be a positive boost for precious metals as an inflation play. Chinese growth forecasts remain robust, albeit much lower than previously projected. Consumer electronic sales continue to weather the economic storm much better than other sectors, which could provide good demand for industrial metals. This can be seen as a positive force for Copper, as well as outside markets, such as Silver, that have been plagued by worries over growth. Interest rates are very likely to remain extremely low across the globe as long as Europe is mired in its current mess and the US and other nations are unable to grow at a reasonable pace organically, suggesting consumers will have cheap financing to continue buying electronics and, also, inflation could be difficult to stop once it starts.
Technical Notes
Turning to the March Copper chart, we see prices breaking out of the wedge formation that has been forming for several months. The measure of the wedge suggests prices may come up to test the 4.50 level over the long-term. Prices are above the major moving averages, which can be seen as positive for prices. The RSI indicator is nearing overbought levels, suggesting prices may face a bit of near-term resistance.
Rob Kurzatkowski, Senior Commodity Analyst
