Copper: Red Metal Rocketing on Strong China Story

Copper prices exploded to their highest level in over two years this week thanks to US Dollar weakness and a China-related story which has been fuelling commodity markets. The US Dollar continued its decline this week as the Fed kept policy unchanged at the July FOMC. The Fed said that they intend to begin balance sheet normalisation soon (which markets expect will be in September) but the key focus was the downgrading of the bank’s inflation assessment.

Following four consecutive misses on the CPI reading, the Fed noted that measures on inflation have declined and that CPI is running below the bank’s 2% target but is expected to hit the target over the medium term. Subdued inflation is leading to many to reprice the odds of a rate hike over the remainder of the year which now sits at just 46% for the December meeting.

Alongside Dollar weakness, the reporting of a potential ban on scrap metal in China sent copper surging higher as traders capitalised on the expected increase in demand for refined metals. It was reported on Wednesday that the recycling branch of the country’s non-ferrous metals association received a notice from government officials that there will be a ban on importing scrap copper by the end of 2018.

According to SMM, data shows that the country imported around 1.2mio tonnes of copper last year and is expected to import around 1.27mio tonnes this year, of which around 750k – 950k tonnes would fall under the new ruling. As such, there would need to be a significant increase in the purchase of refined metals to make up the shortfall.

Having spent the year so far congested in a tight range, copper bulls were finally rewarded this week as the red metal exploded higher, continuing the momentum that built up over the Trump election campaign. Copper has now broken above the long term bearish trend line from 2010 highs and is fast approaching the 2015 swing high around 2.956. If the weekly close remains above the bearish trend line, traders can expect a test of the 2015 high next. To the downside, support comes in along the rising channel base running from late last year.

Iron: Goldman Sachs Issue Bullish Forecast, But Still Bearish for 2018

Following the sharp rally that has played out over a recent week, Iron ore prices consolidated this week but didn’t concede any of the recent gains, with the focus remaining on further upside. Indeed, in a note issued this week, Goldman Sachs outlined that they have now raised their iron ore forecast by 27% due to stronger-than-expected demand in China and higher prices. The bank’s 3-month forecast is now at $70 per tonne, up from $55 prior and the year-end target at $60 a tonne from $55 previously.

Iron ore prices have been rebounding strongly recently as steel mills in the country have been enjoying increased product prices and stronger profits following the shuttering of some capacity by the government. This has seen active producers making record volumes which have helped offset increased supply from Brazil and Australia. Goldman forecast this dynamic to continue to support the metal over the short term, however, the bank still takes a bearish view over 2018.

The recent rally in Iron, which has jumped over $20 in 2 months has stalled for now, but further upside is expected. Price is currently challenging resistance at the mid-November 2016 low around $70. A break of this level will be needed to signal further upside while to the downside, support comes in at early July high around $65. A break below this level will be needed to alleviate the immediate upside focus.