While volatility remains a risk, copper prices traded in a tight range throughout October. In general, prices traded just above the low found in late September. Copper was also among multiple base metals who’s prices move sideways as the macro downtrend remains on pause.
Dollar Found a Top, Direction Uncertain
November 2 marked the fourth consecutive (albeit universally-expected) 75-basis-point rate hike. Over nearly 8 months, the Fed has managed to raise rates by a total of 375 basis points. The steep increases continue to support a strong U.S. dollar, which has, in turn, helped pull the copper price downward. But as the U.S. dollar moves sideways, markets remain uncertain about future direction.
While a dovish pivot on the part of the Fed remains out of the question, officials appeared notably more qualified with regards to their future approach. According to a recent press release, “in determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” That said, Chairman Powell did caution markets that the Fed had “some ways to go” and anticipated “ongoing increases.” Powell also noted “the ultimate level of interest rates will be higher than previously expected.”
Copper Price Could Break New Lows
Despite months of hitting fresh 20-year highs, the macro uptrend for the U.S. dollar index faltered after peaking in late September. While it consolidated through October, the index rallied once again in the lead up to the Fed meeting in early November. However, continued but potentially-small rate hikes proved insufficient in sustaining that rally. Currently, the index continues to fall and may even challenge its late October low.
As the downtrend for the copper price index appeared to bottom out in mid-July, and prices have since struggled to break out of range. However, on November 3, prices saw an over 5% rally as the U.S. dollar index began to slide, unable to create a higher high. For copper, this could prove the beginning of a breakout to the upside should the bullish momentum continue amid a weakening dollar. At the very least, a less volatile U.S. dollar would be a more neutral influence on copper and commodity prices alike.
China Rumors Spark Copper Price Rally
As the dollar weakened, speculation of a potential end to China’s zero-COVID policies added further bullish sentiment. After nearly three years, China remains the last major hold out for an economically restrictive approach to the virus. Many expected that President Xi’s reelection would trigger a policy reversal. Instead he used last month’s 20th Party Congress to repeatedly declared his support for the restrictions. That said, rumors began to circulate in early November that Chinese policymakers aim to exit zero-COVID by March 2023. Such reports suggest officials are concerned over the economic costs of rampant lockdowns, which have dampened both demand and production.
Speculation that zero-COVID may soon vanish triggered rallies throughout multiple markets. For instance, the iShares China Large-Cap ETF (FXI) jumped almost 14% during the first week of November following months of heavy declines. Meanwhile, copper prices have been supported over recent months due, in part, to strong Chinese demand, the prospect of China reopening helped prices bounce above their tight October trading range.
Officials Quick to Support Zero-COVID
Unfortunately, officials from the National Health Commission were quick to dump water on the rumors. By Nov. 5, official Hu Xiang called the approach “completely correct.” He also characterized it as “the most economical and effective.” While costly, zero-COVID has helped sequester domestic demand and therefore kept Chinese inflation low compared to other countries. This may be a factor in why China wants to keep a relatively loose monetary policy while Western nations continue to raise rates.
Of course, support for zero-COVID among Chinese officials does not necessarily mean that the rumors are untrue. Indeed, the target date specified in those rumors is still roughly four months away. However, what is certain is that when China reopens, markets like copper will likely rebound. As production becomes untethered by restrictions and the full extent of Chinese demand is unleashed, the copper price could see historic moves.
By Nichole Bastin
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