Dr Copper and the AUDUSD

One of the traditional measures of global economic health is the price of copper. Copper is used extensively in industrial and manufacturing industries. Demand for copper increases during an expansionary economic cycle while demand for copper drops when global growth is slowing. As such the price of copper often moves in sync with the global economy. There is a belief that the price of copper turns ahead of inflexion points in the global economy, hence the nickname “Dr. Copper.”

It is notable this morning that the price of copper has closed at a 13-week high, after rallying another +2.50% overnight. This takes the gains from last week’s lows to a fraction under +7.00%. One of two factors generally drive moves in commodities price; changes in demand for the commodity, or changes in the supply outlook. The catalyst behind coppers recent price rise has been the latter.

Unions at the BHP/Rio Tinto owned Escondida mine in Chile which produces about 5% of the worlds copper supply announced last week they had begun wage negotiations which includes a bonus of about $34,000 per worker. This announcement has revived memories of a similar negotiation in February 2017 which led to a six-week strike that pushed the price of copper sharply higher.

This follows the closure of India’s second-largest copper smelter in late May after 13 people were killed during a protest to demand its shut down due to environmental concerns. Apart from the human tragedy, there are now concerns that the copper market which was expected to fall into deficit in 2019 could fall into deficit much sooner than expected.

The effects of a supply shock generally last for a much shorter time than a demand shock. Investors in copper mining Australian companies BHP and Rio Tinto will consider the benefits of a higher copper price against the possible cost to the companies if workers end up going on strike at Escondida.

For AUD forex traders, it may also pay to keep an eye on the progress of coppers price and the negotiations in Chile. The AUD, as can be seen via the chart below, follows closely the price of copper futures. According to the handy Moore Research Centers, 90-day correlation matrix found here https://www.mrci.com/special/corr090.php the current correlation between the AUDUSD and copper futures is 0.72. As a reference point, the last time copper futures closed above 3.21, the AUDUSD was trading above .7800c.

Of course, there are other inputs to consider besides the price of copper which determines the price of the AUDUSD including today's Q1 Australian GDP number. However, should the AUDUSD rebound and post a daily close above the area of major resistance .7660/80, it would erase the previously held bearish technical picture. With “Dr. Copper” providing a positive lead it may soon be time to reconsider short AUDUSD positions.

Source Tradingview. The figures stated are as of the 6th of June 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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