Is there such a thing as Dr. Copper?
In the world of metal commodity trade, copper is seen to have predictive power concerning the global economy.
In a way, the Dr. Copper moniker is similar to the adage “oats knows” in the grain world. A rise or fall in oats was once considered to be a leading indicator of the direction of the whole grain complex.
But oats’ reputation as a market lead is now history and copper might also be on shaky ground.
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Copper’s reputation grew from its importance in manufacturing. It is used in a vast range of products and so if manufacturers expect to increase production, they need more copper and its price will rise.
The argument extends that if copper rises, then perhaps increasing global economic activity will stimulate demand for all commodities.
Copper has undergone a multi-week rally and it intensified since the American election, pushing the price of the metal to a one-year high.
Its price had fallen from a peak in 2011 to a low in late 2015 as global economic growth stalled even as the U.S. economy grew slowly. Copper prices remained lethargic this year until the autumn when the value began to rise, on both a decline in production and the Chinese government’s decision to spend more on infrastructure to stimulate its economy.
In the days before the U.S. election, many investors were rattled and uncertain what a Donald Trump victory might mean, given his stand against trade agreements.
However, since his victory, the market narrative has focused on his promises regarding infrastructure spending and tax cutting that could stimulate the economy and demand for raw materials, including copper.
The prices of other metals have also risen, helped by the copper rally.
But several analysts now say that the extent of copper’s rise has outpaced the supply and demand fundamentals. The latest strength has more to do with high speed algorithmic trading than with the real world.
And while infrastructure spending in China and the U.S. should provide global stimulus, it could be offset on the downside by uncertainty caused by Britain’s exit from the European Union and rising anti-globalization, anti-trade sentiments around the world.
The crop market appears to have paid little attention to the copper rally. It focused more on the U.S. Department of Agriculture monthly supply and demand report last week that increased the forecast of U.S. corn and soybean production and ending stocks.
Prices were also pressured as the American harvest raced toward its conclusion, more Canadian farmers wrapped up their harvests and the U.S. dollar rose.
If a Trump administration gets Congress to back his infrastructure stimulus, that could further lift the U.S. dollar.
Stimulus can cause inflation and that would give the U.S. Federal Reserve reason to pick up the pace of its interest rate increases and that would put upward pressure on the buck.
A strong U.S. dollar would be an impediment to U.S. grain exports.
For Canada, rising U.S. interest rates would likely keep downward pressure on the Canadian dollar, which lost about a cent last week.
On Nov. 14, it was trading below US74 cents, its lowest level since February. The loonie set a multi-year low in January at 68 cents.
The failure by the Organization of Petroleum Exporting Countries, better known as OPEC, to make any headway on reducing oil production is weighing down crude prices and that also has a negative impact on the loonie.
