How high will copper rise?
Copper is on a tear this week, surging to 30-month highs as several factors push the metal higher.
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With gold tracking sideways caught in the crossfire between a Biden reflationary boost and positive vaccine news, base metals and iron ore continue to move northwards. Risk assets have received a lift this week from continued optimism over another Covid-19 vaccine, while better-than expected Chinese data has seen copper hit levels not seen since June 2018.
China recovery boosts demand
The copper price has been moving higher since March, due to the strong economic recovery in China. The country is the world’s biggest buyer and consumer, and recent data out this week showed that both industrial output and fixed-asset investment beat expectations. The latter is important as it suggests that strong spending on infrastructure may continue to support the market into 2021.
China also agreed a trade deal with 14 other Asian nations this week, the first time it has signed a regional multilateral trade agreement. The authorities are clearly very keen to support the economic recovery, further shown by their recent injection of over $120 billion into the banking system.
Weak dollar, strong copper
Copper prices have an inverse relationship with the greenback. That is because a weaker dollar makes it cheaper for foreign buyers to buy more copper. A Biden presidency and a split Congress will likely maintain the pressure on the Fed to keep policy accommodative. This means with relatively slow growth expectations, the headwinds for the dollar may remain for some time. And if inflation does surprise on the upside, investors may be prompted to add commodities to their portfolios.
News of recent supply disruptions in Peru and Chile, together with inventories remaining low historically, are all helping copper prices. Further out, the synchronised recovery in global demand is key and will further boost commodity currencies like the Aussie, which are already benefiting from this unfolding story.