FxWirePro: Stay short Dec’17 LME copper but longs for swing traders

The copper prices surged today extending yesterday’s gains taking the bull swings to the highest in more than two years on expectations of strong economic growth in China and news of Chinese restrictions on scrap imports that would increase demand for imported refined copper.

The micro indicators in the Chinese physical copper market that supported the bullish view underpinning our previous long copper trade recommendation turned more negative in early July.

Withdrawals from the bonded zone warehouses in China stalled, the premium for imported copper has dropped and while physical prices have continued to trade at a premium to the listed SHFE prices, this premium has compressed. Demand is also expected to seasonally slow in 3Q.

In addition, heavy rains in the center and south of China have caused serious flooding, affecting downstream manufacturing activities in those regions.

With the exception of Grasberg, recent copper supply-related issues have been largely resolved and we see limited scope for further major labor-related supply disruptions this year. We expect copper mine production to growth by 2.8% yoy in the second half of the year, up from -0.1% in 1H.

CRU understands that the Chinese government has moved to limit imports of Category 7 scrap types. CRU's Beijing analysts conducted a market survey, speaking with industry associations, processing facilities, and secondary plants in China so that we can understand the impact these restrictions will have on the copper and aluminum markets.

Finally, from a macro perspective, J.P. Morgan expects Chinese growth to slow to a 6.4% pace in the second half of the year, down from close to 7% averaged in 1H. Combined, we think the turn in micro signals as well as our macro outlook warrants going short copper.

Add shorts in Dec’17 LME copper at a price of $5,855/t on July 7, 2017. Trade target is $5,000/t with a stop loss of $6,150/t.  Marked to market on July 20, 2017, at $5,977.88/t for a loss of $122.88/t or 2.1%.

Technically, the pair is awaiting its next leg higher after breaking of strong resistance at 2.830. Next major bull target is seen at 2.946. A decisive break above will extend bullish trend. Stiff resistance levels are seen at 2.9010 and 3.0 Strong support is seen at 2.8375 and 2.7250.

On short term trading perspectives, we recommend buying XCUUSD on dips. Watch out for the break above 2.946 for a continuation of the uptrend.