Weekly Commodities Wrap: Copper Prices Continue To Surge Despite Bearish Forecasts

Aug 25, 11:32 am
Rolls of copper wire

Copper: Copper Hits Highest Level Since 2014

The red metal continued its expansion higher this week, surging to fresh four-year highs with gains on the year now more than 19%. As global growth continues to strengthen, demand for the industrial metal is growing. Data out of China recently, the largest global consumer of copper, has been improving also which has been bolstering global risk sentiment, despite a recent escalation in geopolitical tensions.

A large contributing factor to the rally this year has been the weakness in the US Dollar as trades pair back their Fed rate hike expectations in line with falling inflation which has now undershot expectations for five consecutive months.

Markets now await Fed chair Yellen who speaks today at the Jackson Hole Symposium. The Fed chair is expected to address a range of issues, but traders will be most keenly listening for comments on the future of rates as well as the assessment of the current inflation environment and her outlook going forward.

However, some analysts are now warning against the momentum in copper, forecasting a pullback in prices as new projects in Africa, Panama and Chile are expected to see a surge in supply starting from 2018 which are expected to weigh on prices. However, in the near term, the rally looks set to continue as severe supply disruptions (strikes and weather issues) continue to widen the deficit, keeping prices supported.

The rally in copper this week has seen price break out above the 2015 swing high (2.964) to trade levels not seen since 2014. With both the bearish trend line from 2011 highs and the 2015 swing high broken, the rally has been given fresh momentum, and focus remains firmly on the top side. The next key resistance will be the mid-2014 swing high around 3.266. To the downside, a retest of the broken bearish trend line should provide support with deeper support at a retest of the prior 2016/2017 highs.

Iron Ore: The Rally Continues As Speculators Pile In

Following a small pullback last week as the Chinese steel market fell, Iron ore rebounded strongly this week to trade near $80 as resurgent demand from Chinese steel mills propelled prices higher. Traders in Shanghai say that high-grade iron ore is in big demand as mills look to increase productivity. However, buying was slightly curtailed mid-week following a further warning from the China Iron and Steel Association that gains in the metal were unlikely to extend further. The CISA continue to try and drive down speculation in the market, but investors continue to bet on further upside.

This week’s rally took price back up to levels not seen since mid-March. However, for now, the psychological level of $80 is providing strong resistance while the recent $77 swing high (broken this week) should provide support if retested.

Zinc: Rally Takes A Pause, but Fundamentals Remain Strong

Despite the moves seen across the broader metals complex, zinc prices stalled this week, after exploding higher last week. A boost in global manufacturing has been adding strong support for the metal with the latest eurozone manufacturing data printing its highest level for six and a half years, underscoring the momentum in manufacturing in developed economies.

China’s actions to combat pollution are also having a positive effect on prices, and smaller and illegal zinc production units are facing closure. Speculative players have also been contributing to the price rise as the giddy momentum seen in copper and iron prices has been spilling over into Zinc also.

Last week’s rally took prices well above the 2016 and prior 2017 highs around 2975.06 which had proved a sticking point over the early part of the year. With the price now well above those levels, any retest of that zone is expected to provide support. To the topside, the next resistance will be a test of the rising channel/wedge formation which is currently framing price action.

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.