China’s weakening currency is alarming metals traders, summoning memories of the country’s 2015 devaluation, which sent the market and mining stocks into a tailspin.
Copper prices have closely followed the renminbi’s dramatic fall towards its lowest level in a year against the dollar this month. It is a correlation that one metal trader says is “the highest it’s ever been”.
The 10-day correlation between the price of copper and the renminbi-dollar exchange rate has been close to 90 per cent, according to ING.
This has been driven by a jump in the number of short copper futures positions on the Comex exchange in New York. That helped drive the price of copper below $6,000 a tonne for the first time in a year last week.
“It’s short anything that is China-related now,” said Oliver Nugent at ING.
But after the panic comes the question of what next. In 2015, after the initial plunge in metal prices and mining stocks, some investors made fortunes from the subsequent rebound as fears about China abated. What about this time?
Copper’s path will probably depend on how far China is willing to go in its efforts to reduce debt in its economy, an issue that has already sparked higher corporate bond defaults and a slowdown in the availability of credit.
Combined with the effects of the escalating trade spat with the US, China’s economy could slow further, an outcome that would sap copper demand given that the country consumes an outsized 40 per cent of the world’s supply of the metal.
Any slowdown in China is also likely to have knock-on effects on other copper-consuming markets such as Japan, Korea and Germany.
So far analysts have only slightly trimmed their China GDP forecasts, with UBS cutting its estimate to 6.5 per cent growth this year, from an earlier 6.6 per cent.
And Beijing is intent on managing the economy, with China’s central bank injecting Rmb502bn ($74bn) of cash into the banking system this week via loans to commercial lenders.
Ultimately, any repeat of 2015’s lucrative trade in metals depends on China maintaining a robust level of growth as the authorities target the shadow banking sector.
Source: FT.com
