Copper price extended its three-week rally today as investors remained optimistic about recovery of the global economy. The price is now at $2.5410, which is the highest it has been since March 11 this year.
Copper is a base metal that does well when the global economy is doing well because it is used in significant parts of the global economy. For example, copper wires are used in electronics and in power supply. As such, analysts call it a barometer of the world economy.
In most cases, copper price flourish when the economy is doing well because of higher demand. Similarly, it sinks when the economy is not doing well. The same happened during the coronavirus pandemic when the price dropped to $1.9800.
This week, data from around the world has shown that the economy is indeed recovering. For example, in China, the manufacturing PMI rose to more than 50. In other countries in Europe and the US, the recovery was significantly better than that of April. Last Friday, analysts at Bank of America increased their target for the metal, saying:
“We also note that the current recession is different to the usual downturns on various other metrics: the epicenter is in services, not manufacturing; governments are gearing up to implement remarkable fiscal stimulus packages, reflected in China’s NPC and Europe’s Next Generation EU initiative.”
This is a sign that demand of copper is rising. Want more evidence? Look at the share price of BHP and Glencore, the two leading copper producers below.
The second reason why copper price is in an upward trend is the weaker dollar and supply constraints. As we have covered before, the US dollar index has been in a downward trend because its demand has eased. As a base metal that is traded in dollars, a weaker dollar is usually supportive of the price.
Meanwhile, there are supply constraints because the coronavirus pandemic is still spreading in large numbers in countries like Peru, where the metal is mostly mined.
The disease could halt the mining, which continued unabated as the virus spread. According to Bloomberg, companies like Codelco and Vale implemented several safety measures to prevent the disease. Now, South America has become the epicentre of the disease, increasing risks for the metal.
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On the daily chart, copper price has moved to the 61.8% retracement level. It is also above the 50-day and 100-day exponential moving averages. At the same time, the RSI has rallied, and is now at 66, a few points below the overbought level of 70. This means that the price has more room to rally as bulls remain in total control. The next target will be the 78.2% retracement at $2.6945.
On the flip side, a move below the 50% retracement of $2.4380 will invalidate this trend.