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A softer USD and the threat of strike action in Chile underpin copper

May 21, 2021by Nicholas Kabaso
  • Copper has dusted itself off this morning with a softer USD and the threat of strike action in Chile underpinning the red metal into the close of the week.  The metal is some 6% off its highs of $10747.50/tonne hit earlier in May as speculators booked profits and investors trimmed longs on what could really be termed an overheated market. The reason given for the selling was a potential slowdown in China.
  • Pulling back the lens, we still remain bullish on industrial metals with pull backs seen as a healthy part of market function. The structural topside bias remains intact as monetary and fiscal stimulus programmes remain in place and legislation pushing for the decarbonisation of the globe continues to be enacted by governments around the world.
  • The US Treasury appears to have been busy. Not only has it proposed a global minimum corporate tax to curtail tax avoidance from companies setting up in more tax-friendly jurisdictions for the purposes of saving on tax, but they are also looking to raise more tax revenues. That ex-tended into the crypto-currency space as well, where the Treasury announced that any transaction of $10k or more would need to be de-clared, whether that be through an exchange, a transaction, asset holdings or a transfer of wealth. Although not expressly stated, the theme of governments around the world looking for more tax revenues will see the likes of unregulated crypto markets targeted, especially as they are deemed transactional nodes that facilitate corruption, trafficking and tax evasion.
  • Weekly jobless claims that were released yesterday showed a further drop of 34k to bring initial claims down to 444k, while continued claims increased to 111k as rehiring efforts appeared to slow. The data highlights the uneven nature of the recovery and why the Fed is likely to per-sist with its loose monetary policy stance for as long as it takes to secure a strong economic recovery. As the pandemic eases and the economy continues to open up, the recovery trend will reassert itself. H2 2021 will likely generate a much stronger improvement in overall economic ac-tivity.
  • The preliminary May PMI figures for the US are expected to continue to highlight the country’s strong economic growth outlook, although we could see some moderation from the highs reached in May. Inflation concerns are building, while the labour market recovery has not been as swift as many expected. However, demand should remain strong, especially as more of the economy has reopened and allowed spending levels to pick up even further. Given the current focus on inflation, it will be interesting to see how both input and output cost indices have changed. With the recent bullish run for commodities, it is likely that we could see input price levels reach their highest for some time, stoking fears of higher consumer inflation.
  • The USD remains on the defensive as data released so far this week has not done enough to build expectation of a taper. Quite the opposite, investors will feel comfortable that the Fed will persist with its ultra-accommodative stance and that the current fundamentals, reflected through the ballooning twin deficits will continue to erode the broader value of the USD. Technically, some support has been found in the past three trading sessions just below the 89.70 level of the trade weighted USD, but a punch below that will likely trigger another run against the USD. Some focus will turn to the PMI data later today for guidance on the strength of the US economic recovery. A strong outcome will help the USD recover some of its composure.
  •  On a YTD basis, the Zambia Kwacha, down by nearly 6%, is the second worst-performing African currency against the USD. Only the Ethiopian Birr down by 10% has fared worse. While copper prices have rallied, the Kwacha has been unable to fully capitalise as demand for hard currency and pressure on debt servicing continues to weigh. Therefore, the Kwacha has traded at record lows and is likely to continue to do so in the near term. However, in the coming week, the depreciation is expected to be at a slower pace.
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Nicholas Kabaso

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