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Article / 05 September 2017 at 11:54 GMT

Copper looking stretched as it continues higher — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
Denmark
  • HG Copper hits three-year high
  • HGZ7 future targeting $3.29/lb
  • Futures spreads remain in contango

Dalian, China
Warning signs: Chinese leading indicators have been falling since April 
while copper prices have rallied by 15%. Photo: Shutterstock

By Ole Hansen

HG Copper reached a three-year high earlier today as it continues its rally towards the next major technical target at $3.29/lb. However, we view the metal as being increasingly detached from fundamentals with traders looking more at the current momentum than specific drivers to justify a 27% rally since the low point in May

HG Copper (HGZ7) is targeting $3.29/lb, a local top from July 2014 as well as the 50% retracement of the 2011-2016 bear market. The equivalent level on LME copper is $7,250/MT.

HG Copper, first month cont.


















Source: Saxo Bank

Key drivers behind the rally

  • The introduction of clean air policies have removed smelter capacity in China. This has helped create a major buzz around the most impacted metals of aluminum and zinc. 
  • The latest rally kicked off around the time the Chinese yuan began strengthening against the US dollar back in May. It could turn out to be a temporary show of strength ahead of the 19th Chinese Party Congress beginning October 18.
  • Much has been made out of the relative bigger usage of copper in electric vehicles than in normal combustion engines. This will become an important source of additional demand but not yet big enough to have a meaningful impact. 
  • Falling inventories monitored by exchanges outside China as arbitrage opportunities has moved copper to China. 
Copper, Yuan and refined trade
 
Warning signs

  • Bullish fund bets have reached a record high and in the process have dislocated from the otherwise decent correlation to China Manufacturing PMI. 
  • China leading indicators (Nomura’s) have been pointing lower since April, during which time copper has rallied by more than 15%.
  • RSI shows the price is overbought on all three time periods out to 30 days.
  • A near-balanced refined copper market in 2017-18 combined with expectations of a rebound in mine supply from major suppliers in Chile and potentially Indonesia
  • Futures spreads remain in contango which should not be the case if consumers were worried about the availability of supply. 

Copper drivers





















I agree with a recent gadfly commentator on Bloomberg who wrote that traders no longer buy copper because they love the metal, but because they expect prices to rise.

While momentum remains strong, the selling appetite is likely to be muted but we suspect that increase selling from profit-taking and opportunistic short-selling will emerge ahead of the aforementioned resistance at $3.295/lb.

HG Copper
Source: Saxo Bank

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank  
05 September
Ole Hansen Ole Hansen
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