Rolls of copper

Copper and Yuan Flash Recession Signal to Global Markets

By:Thomas Westwater

Copper prices fall to a multi-month low. Yuan weakness is a clue.

  • Copper prices fall to the lowest level since June.
  • China's weakening yuan underscores lower demand for the red metal.
  • Technicals turn bearish.

Copper prices (/HG) fell about 6 cents, or 1.61%, to trade around 3.6655 per pound on Tuesday, trading to the lowest level since early June and deepening a three-week selloff.

The current weakness is part of a broader unwinding in the red metal from January. The move's strength is also notable; the month-to-date performance is -8.5%. That is the biggest monthly decline since June 2022.

What's with copper's weakness?

Several things are driving down the price of copper. The metal is typically seen as a proxy for global economic health, explaining its nickname as Dr. Copper. That is due to copper’s heavy use in industry while not being used as a traditional store of value, such as gold or silver.

So, what is up with copper? We need only look to China to tell us part of the story. The world’s second-largest economic engine has fueled its growth via construction and urbanization over the past decade, which requires a lot of copper. Now, many believe that China’s growth will continue to slow.

The central authorities are fighting to stimulate the lackluster activity to counter the slowdown. Earlier this week, the People’s Bank of China (PBOC), which is like the Chinese version of the Federal Reserve, cut its key lending rates. Those rate cuts aim to spur credit growth, although loosening the credit supply doesn’t do much if the demand isn’t there.

The Chinese yuan is one indicator we can look at besides copper to see that the market isn’t really buying the Chinese revival story. The yuan ($CNH) weakened past 7.3231 on Tuesday, putting it at the weakest since late last year. At the same time, Chinese officials have moved to limit economic data that has traditionally been readily available to markets. That isn’t really something you do to inspire confidence. The yuan’s surrender to the dollar over the past several weeks reinforces the signal copper is sending.

Speaking of the dollar, the U.S. currency has pivoted higher over the last few weeks following a broader decline that was driven by markets anticipating the Federal Reserve was done hiking rates. The broad-based DXY Index—which measures the currency against a basket of peers, including the euro and Swiss franc—rose over 3% over the last five weeks.

That greenback's strength makes copper more expensive for buyers outside the United States, and China is a big buyer. Should investors apply the same signal to the global economy? That much isn’t clear, as other major economies, like the U.S., are heavily service-based and still performing well. Altogether, however, it doesn’t bode well for the economic outlook.

What to watch in the week ahead for copper traders

  • Euro Area Q2 GDP Growth Rate
  • U.S. building permits (July)
  • U.S. FOMC minutes
  • Japan inflation rate (July)

Copper technical outlook

Prices are testing the 78.6% Fibonacci retracement level from the May to July move. A breakdown could leave the recent selling uninterrupted. The metal is also trading below all its key moving averages, including the 200-day simple moving average (SMA) shown on the chart. There is currently little confidence for bulls to step into the ring.

HG Price Chart

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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